PYRAMID BREWERIES INC, 10-K, 2000-03-20

PYRAMID BREWERIES INC
10-K, 2000-03-20
MALT BEVERAGES

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

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

For the year ended December 31, 1999

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

For the transition period from to

Commission File Number 0-27116

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

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<S> <C>
Washington 91-1258355
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>

91 So. Royal Brougham Way,
Seattle, WA 98134
(Address of principal executive offices) (Zip code)

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:

Common Stock $.01 Par Value

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

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. [_]

The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 1, 2000, was $15,904,704.

The number of shares outstanding of the registrant's common stock as of
March 1, 2000, was 7,952,352.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 4, 2000 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, 1999

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Page
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PART I

Item 1. Business...................................................... 1

Item 2. Properties.................................................... 4

Item 3. Legal Proceedings............................................. 5

Item 4. Submission of Matters to a Vote of Security Holders........... 5

Item 4A. Executive Officers of the Company............................. 5

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 6

Item 6. Selected Financial Data....................................... 7

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 8

Item 8. Financial Statements.......................................... 13

Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................... 13

PART III

Item 10. Directors and Executive Officers of the Company............... 14

Item 11. Executive Compensation........................................ 14

Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 14

Item 13. Certain Relationships and Related Transactions................ 14

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K..................................................... 14
</TABLE>
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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
also produces a line of handcrafted sodas and operates restaurants adjacent to
its two breweries, under the Pyramid Alehouse brand name. The Company produces
and markets more than twenty ales and lagers under the Pyramid and Thomas
Kemper brands. In March 1997, Pyramid added root beer and other premium sodas
to its business when it acquired the Thomas Kemper Soda Company.

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 production capacity of
172,000 barrels as of the end of 1999. The Seattle Brewery opened in March
1995 and has an estimated annual beer production capacity of 92,000 barrels.
The Berkeley Brewery was completed in February 1997 with an initial estimated
annual beer production capacity of 80,000 barrels and a maximum design
capacity in excess of 200,000 barrels. 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 1.3% in 1999, while craft beer shipments, which comprise
approximately 3% of the total, were estimated to have increased by 7%. In the
Company's core markets however, the craft beer category is much larger,
representing approximately 8% to 10% of beer shipments in these markets.

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 ales. Under the Thomas
Kemper brand, the Company brews authentic German styles in addition to styles
popularized in other European countries. 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 $4.99 to $7.49 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 1999 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's premium soft drinks currently include root beer, cream
soda, orange cream soda and black cherry soda. 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.

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high traffic locations. The Alehouses had approximately 500,000 guest visits
during 1999; guest purchases approximated $2,200,000 of the Company's beers
and sodas and more than $140,000 in branded clothing and other merchandise.

The Company's beverage operations contributed 73% of net sales in 1999, with
beer comprising 59% and soda 14%. Alehouse operations contributed 27% of net
sales in 1999.

Business Strategy

During 1999, the Company re-evaluated its overall market position, and
changed some key elements of its strategy. The Company's strategy had been to
develop a network of company-owned and operated full scale production
breweries marketing a wide selection of high quality, full-flavored ales,
lagers and sodas for regional markets throughout the United States. This
strategy had been on hold since 1997, when adverse market conditions (see
'Competition'), led the Company to refocus on its main West Coast markets
serviced by its existing breweries.

As a result of the strategic review in 1999, 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 no
longer plans to expand via development of a network of production breweries
throughout the United States.

Building a Strong Portfolio of Craft Beer Brands

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 its beers under the Pyramid and Thomas Kemper brands. The
Pyramid brand accounted for 88% of the Company's beer sales and 73% of the
Company's beverage sales in 1999. 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 multiple brand strategy, coupled with a 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 all of 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, beer festivals and targeted charitable donations of its products
to assist in developing its market presence. The Company also has an award-
winning web site and an active public relations program. The Company does not
compete directly with the national brands in terms of mass-media advertising.

Increasing the Focus on the Craft Soda Business

The Company acquired the Thomas Kemper Soda Company in 1997. Since that
time, the brand has added significant revenues to the Company, with a net
sales growth of 31%. The soda business represented 19% of beverage sales in
1999, and 14% 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

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infrastructure to further develop the Thomas Kemper brands. The Company will
also seek opportunities to expand the craft soda portfolio within its core
western markets.

Building Brand Awareness and Sales through Company-Owned Restaurants

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 equally popular and a significant source of revenues.

The Company currently operates restaurants adjacent to its Seattle and
Berkeley breweries. The restaurants are operated under the Pyramid Alehouse
brand name. In 1999, the restaurants contributed sales of $7,251,000,
representing approximately 27% of total net sales. The restaurants have a
total of over 700 seats, plus outdoor eating areas, and are both situated in
highly visible, high traffic locations. The Alehouses had approximately
500,000 guest visits during 1999; guest purchases approximated $2,200,000 of
the Company's beers and sodas and more than $140,000 in branded clothing and
other merchandise.

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 has announced its intention to further develop the Alehouse
concept via new developments or acquisition 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.

Maintaining a Direct Store Delivery (DSD) System Through Independent
Distributors

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 1999, the Company distributed its products through 160
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.

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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. The
number of competitors has increased dramatically in the past four years.
Statistics from the latest study of the Institute of Brewing Studies indicate
there were more than 1,300 craft brewers in the United States at the end of
1998. 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 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 evidence 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 adjacent
restaurants; one in Seattle, Washington and one in Berkeley, California. In
November 1997, the Company closed its Kalama, Washington brewery and
redistributed production between its Seattle and Berkeley breweries. The
estimated total annual capacity of the two breweries was 172,000 barrels at
the end of 1998 and 1999, based on product mix.

The Seattle Brewery and Alehouse

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 brewery has an estimated production capacity of
92,000 barrels. 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 42,000 square feet of warehouse 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.

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The Berkeley Brewery and Alehouse

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 sub-leasing
that space. The brewery had an estimated production capacity of 80,000 barrels
at the end of 1999, with a designed maximum potential capacity in excess of
200,000 barrels, which can be achieved by adding 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.

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 10 a.m. on May 4, 2000 at the
Hyatt Regency Bellevue at Bellevue Place, 900 Bellevue Way NE, Bellevue,
Washington 98004. 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

Martin Kelly (45)--President and Chief Executive Officer. 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.

Richard M. Denmark (55)--Vice President--Finance, Chief Financial Officer
and Secretary. Mr. Denmark was appointed as Vice President--Finance, Chief
Financial Officer and Secretary in September 1997. Mr. Denmark is responsible
for all finance and administration, including strategic planning, investments
and acquisitions, risk management and investor relations. Mr. Denmark has an
extensive management and financial background. He most recently served as a
Director, Executive Vice President and Chief Financial Officer for Ocean
Beauty Seafoods Inc. (Ocean Beauty), an international seafood processor and
distributor, with 21 sales and production facilities in 11 states, Japan and
Thailand. Prior to joining Ocean Beauty, Mr. Denmark held various executive
positions during an 18-year career with Bank of America and was responsible
for corporate and international lending operations. Mr. Denmark earned a
Masters Degree in Business Administration from the University of California at
Berkeley and a Bachelor of Science Degree from San Jose State University.

Gary McGrath (40)--Vice President--Sales. 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

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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.

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 of Pyramid
Breweries Inc.'s common stock for the years ended December 31, 1998 and 1999.

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High Low
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Calendar Quarters--1998
First Quarter................................................ $3.13 $2.69
Second Quarter............................................... 3.25 2.56
Third Quarter................................................ 2.63 1.25
Fourth Quarter............................................... 1.88 1.13
Calendar Quarters--1999
First Quarter................................................ 2.09 1.56
Second Quarter............................................... 2.38 1.56
Third Quarter................................................ 2.06 1.63
Fourth Quarter............................................... 1.94 1.38
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On March 1, 2000, the Company had 323 stockholders of record. The last
reported sale price per share on March 1, 2000, was $2.00. The Company had no
sales of unregistered securities during 1999.

DIVIDEND POLICY

On December 15, 1999, the Company announced a new dividend policy and
declared its first quarterly cash dividend. The $0.04 per common share
dividend was paid January 14, 2000 to shareholders of record on December 30,
1999. 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. In addition, the Company is required to
maintain a minimum tangible net worth and other covenants under its line of
credit, which may restrict the Company's ability to pay dividends. Except for
S Corporation distributions declared prior to the Company's initial public
offering, the Company had not previously declared or paid cash dividends.

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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
(Dollars in thousands, except per share and operating data)

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<CAPTION>
Years Ended December 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands, except per share and
operating data)
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Income Statement Data:
Gross sales................. $ 28,811 $ 27,326 $ 29,447 $ 25,913 $ 25,321
Less excise taxes........... 1,735 1,672 1,971 1,954 1,902
-------- -------- -------- -------- --------
Net sales................... 27,076 25,654 27,476 23,959 23,419
Cost of sales............... 20,603 20,026 20,861 14,930 13,369
-------- -------- -------- -------- --------
Gross margin................ 6,473 5,628 6,615 9,029 10,050
Selling, general and
administrative expenses.... 8,030 7,903 8,320 6,221 4,085
Impairment and restructuring
charge..................... 3,288 -- 1,600 -- --
-------- -------- -------- -------- --------
Operating (loss) income..... (4,845) (2,275) (3,305) 2,808 5,965
Other income (expense),
net........................ 494 580 (70) 934 (179)
-------- -------- -------- -------- --------
Income (loss) before income
taxes...................... (4,351) (1,695) (3,375) 3,742 5,786
Benefit (provision) for
income taxes............... -- 559 1,232 (1,050) (471)
-------- -------- -------- -------- --------
Net (loss) income........... $ (4,351) $ (1,136) $ (2,143) $ 2,692 $ 5,315
======== ======== ======== ======== ========
Basic and diluted net (loss)
income per share........... $ (0.53) $ (0.14) $ (0.26) $ 0.33 $ --
======== ======== ======== ======== ========
Weighted average shares
outstanding................ 8,231 8,213 8,206 8,200 --
======== ======== ======== ======== ========
Pro forma data: (unaudited)
Income before income
taxes, as reported....... $ -- $ -- $ -- $ -- $ 5,786
Pro forma income tax
provision................ -- -- -- -- (2,019)
-------- -------- -------- -------- --------
Pro forma net income...... $ -- $ -- $ -- $ -- $ 3,767
======== ======== ======== ======== ========
Pro forma net income per
share.................... $ -- $ -- $ -- $ -- $ 0.55
======== ======== ======== ======== ========
Pro forma shares
outstanding.............. -- -- -- -- 6,823
======== ======== ======== ======== ========
Balance Sheet Data:
Working capital........... $ 6,972 $ 6,453 $ 6,499 $ 10,609 $ 26,106
Fixed assets, net......... 22,739 27,559 28,600 27,924 9,541
Total assets.............. 33,710 37,432 38,747 43,491 42,982
Stockholders' equity...... 29,851 34,586 35,700 37,768 35,243
Operating Data (in barrels):
Beer barrels shipped...... 108,400 105,900 121,200 128,100 123,100
Soda barrels shipped...... 29,600 26,700 22,200 -- --
-------- -------- -------- -------- --------
Total barrels shipped..... 138,000 132,600 143,400 128,100 123,100
Beer production capacity
at year-end.............. 172,000 172,000 172,000 193,000 170,000
</TABLE>

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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, sodas, food, apparel and other items in its restaurants.
For the years ended December 31, 1999 and 1998, approximately 59% and 62%,
respectively, of the Company's net sales were sales of beer to third party
distributors. In March of 1997, the Company acquired substantially all of the
assets and assumed certain liabilities of the Thomas Kemper Soda Company which
accounted for 14% and 13% of net sales in 1999 and 1998, respectively. In
February of 1997, the Pyramid Alehouse opened in Berkeley. Total retail
alehouse sales accounted for 27% and 24% of total net sales in 1999 and 1998,
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. During 1999, management believes that the frequency of price
promotions in the craft beer industry increased significantly. 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 calendars 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. In late 1997, the Company's Kalama brewery was closed and production
was redistributed between the Company's Seattle and Berkeley breweries to
increase operating efficiency. The Company recorded a one-time restructuring
charge against earnings of approximately $1,600,000 for write-offs related to
the disposal of fixed assets, severance payments and other plant closure
costs. In addition, the Company recognized a loss on impairment of the Seattle
Brewery assets during 1999 of approximately $3,288,000 as a result of the
under-utilization of the brewery assets that indicated that the carrying
amount of the assets would not be recoverable.

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 1999 and 1998, approximately 61% and 62%,
respectively, of the Company's sales of craft beers were bottled products.

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.

8
<PAGE>

Results of Operations

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Gross Sales. Gross sales increased by 5.4% to $28,811,000 in the year ended
December 31, 1999 from $27,326,000 for the 1998 fiscal year. The sales
increase was primarily the result of a 15.4% increase in alehouse sales in
1999 to $7,251,000 from $6,285,000 in 1998 mainly as a result of increased
patronage at the Seattle Alehouse with the opening of the Seattle Mariner's
baseball stadium directly across the street. Soda shipments increased 10.9% to
29,600 barrels in 1999 from 26,700 in 1998 primarily due to increased
distribution and introduction of the soda sampler pack, which includes all
four of the soda products. Beer shipments also increased to 108,400 barrels in
1999 from 105,900 in 1998. Wholesale beverage sales (beer and soda combined)
in Washington, Oregon and California increased by 4.0% in 1999 compared to
1998 sales. Sales in Washington, Oregon and California accounted for 84% of
the Company's beer sales in 1999 and 1998.

Excise Taxes. Excise taxes were 6.0% and 6.1% of gross sales in 1999 and
1998, respectively. Excise taxes were slightly lower as a percentage of gross
sales in 1999 due to a greater proportion of alehouse and soda sales in 1999
compared to 1998, which do not bear excise taxes.

Gross Margin. Gross margin increased 15.0% to $6,473,000 in the 1999 year
from $5,628,000 in the 1998 year. Gross margin as a percentage of net sales
also increased to 23.9% in the 1999 year from 21.9% in the 1998 year. The
increase in gross margin was due primarily to improved operating efficiencies
at the Berkeley Brewery and a shift in product mix to higher margin products.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 1.6% to $8,030,000 in the 1999 year from
$7,904,000 in the 1998 year. As a percentage of net sales, selling, general
and administrative expenses decreased to 29.7% of net sales in the 1999 year
from 30.8% of net sales in the 1998 year. The decrease in selling, general and
administrative expenses as a percent of net sales was due to higher net sales
and decreased professional, legal and other expenses. Although the decreases
in these expenditures were significant, the net decrease was small as it was
offset by a $480,000 severance accrual recorded during the fourth quarter of
fiscal year 1999. The severance accrual was the result of a reorganization of
executive management.

Impairment Charge. During fiscal year 1999, the Company wrote down
approximately $3,288,000 of impaired long-lived assets. The write-down
included $2,545,000 of brewing machinery and equipment and $743,000 of
leasehold and other equipment. The Company reviews assets for impairment
whenever events or changes in circumstances indicate that the book value of
the asset may not be recoverable. Based on the Company's expectation of future
undiscounted net cash flows, these assets have been written down to their
estimated fair value.

Other Income, net. Other income, net decreased to $494,000 in the 1999 year
from $580,000 in the 1998 year. The 14.8% decrease was due mainly from the
Company's insurance carrier's reimbursement of $250,000 in legal costs in 1998
which was partially offset by increases in other income during 1999. Interest
income was $322,000 and $309,000 for the years ended December 31, 1999 and
1998, respectively.

Income Taxes. As of December 31, 1999, the Company had deferred tax assets
arising from deductible temporary differences, tax losses, and tax credits
offset against certain deferred tax liabilities. During 1999, a valuation
allowance was recorded against the deferred tax asset for the benefits of tax
losses which may not be realized which resulted in no income tax benefit being
recorded for the year ended December 31, 1999 as compared to a benefit of
$559,000 for 1998. Realization of the deferred tax asset representing tax loss
and credit carryforwards is dependent on the Company's ability to generate
future U.S. taxable income. 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. The Company incurred a net loss of $4,351,000 for the 1999 year
compared with net loss of $1,136,000 in the 1998 year. As a percentage of net
sales, the net loss increased to 16.1% for the 1999 year from

9
<PAGE>

4.4% for the 1998 year. The increase in net loss for the year was primarily
the result of the asset impairment charge of $3,288,000 and severance expense
of $480,000, both non-recurring items. Excluding the non-recurring items, the
Company's net loss would have been $583,000 or 2.2% of 1999 net sales.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Gross Sales. Gross sales decreased by 7.2% to $27,326,000 in the year ended
December 31, 1998 from $29,448,000 for the 1997 year. The sales decrease was
primarily the result of a 12.6% reduction in beer shipments in 1998 to 105,900
barrels from 121,200 barrels in 1997. Alehouse sales remained consistent from
year to year although the Berkeley Alehouse was open for eleven months in
1997. Soda shipments increased 20.3% to 26,700 barrels in 1998 from 22,200 in
1997 primarily due to the shorter 1997 sales period as the Thomas Kemper Soda
Company business was acquired in March 1997. Wholesale beer sales in
Washington, Oregon and California declined by 12.6% in 1998 compared to 1997
sales. Sales in Washington, Oregon and California accounted for 84% of the
Company's beer sales in 1998 and 1997.

Excise Taxes. Excise taxes were 6.1% and 6.7% of gross sales in 1998 and
1997, respectively. Excise taxes were slightly lower as a percentage of gross
sales in 1998 due to lower beer sales and to a greater proportion of soda
sales in 1998 compared to 1997, which do not bear excise taxes.

Gross Margin. Gross margin decreased 14.9% to $5,628,000 in the 1998 year
from $6,615,000 in the 1997 year. Gross margin as a percentage of net sales
declined to 21.9% in the 1998 year from 24.1% in the 1997 year. The decrease
in gross margin was due primarily to the application of certain fixed and
semi-fixed costs to lower level of beer volumes in 1998.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by 5.0% to $7,904,000 in the 1998 year from
$8,320,000 in the 1997 year. As a percentage of net sales, selling, general
and administrative expenses increased to 30.8% of net sales in the 1998 year
from 30.3% of net sales in the 1997 year. The increase in selling, general and
administrative expenses as a percent of sales was due to lower net sales and
increased expenditures related to the upgrading of the Company's computer
systems, legal and other expenses.

Restructuring Charge. In October 1997, the Company announced a restructuring
of the Company's marketing and brewery operations, including a refocusing of
marketing resources on Western and Southwestern markets and the closure of the
Company's Kalama, Washington plant. The Company incurred a one-time charge of
$1,600,000 in the fourth quarter of 1997 for write-offs related to the
disposal of fixed assets, severance payments and other plant closure costs.

Other Income (Expense), net. Other income (expense), net increased to income
of $580,000 in the 1998 year from expense of $70,000 in 1997. The increase was
due mainly from the Company's insurance carrier's reimbursement of $250,000 in
legal costs and gains on the sale of equipment in 1998 compared to losses on
the disposal of fixed assets in the prior year. Interest income was $309,000
and $352,000 for the years ended December 31, 1998 and 1997, respectively.

Net Loss. The Company incurred a net loss of $1,136,000 for the 1998 year
compared with net loss of $2,143,000 in the 1997 year. As a percentage of net
sales, the net loss decreased to 4.4% for the 1998 year from 7.8% for the 1997
year.

Liquidity and Capital Resources

Net cash provided by operating activities for the year ended December 31,
1999 increased 160% to $1,872,000 from $728,000 for the prior year. At
December 31, 1999, the Company's working capital increased to $6,972,000
compared to $6,453,000 at December 31, 1998.

10
<PAGE>

Net cash used in investing activities for the year ended December 31, 1999
was $760,000 compared to $898,000 for the prior year. The cash used in
investing activities in 1999 included the upgrade of production equipment at
the Berkeley Brewery, remodel of the Seattle Alehouse and various upgrades of
computer equipment, net of proceeds from the sale of equipment. Cash used in
investing activities during 1998 included the purchase of system software and
completion of the installation of soda production equipment at the Berkeley
Brewery.

On December 15, 1999, the Company 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. In addition, the Company is
required to maintain a minimum tangible net worth and other covenants under
its line of credit, which may restrict the Company's ability to repurchase
shares. As of March 1, 2000, the Company has purchased 245,700 shares at an
average price of $1.97 per share.

The Company has a $10,000,000 line of credit for short-term operating needs.
The line of credit revolves through April 30, 2000, during which time the
required payments will be interest only. At that date, any outstanding balance
will be due in full. Borrowings under the line of credit will incur interest,
at the Company's option, at either the bank's prime rate or at LIBOR plus 100
basis points. Up to $5,000,000 of the line of credit may be used to finance
acquisitions. Amounts used to finance acquisitions may be converted to a four-
year fully amortizing term loan, with an additional option to fix the rate of
interest at the bank's prime rate plus 125 basis points. There were no
outstanding borrowings on the line of credit during fiscal year ended December
31, 1999.

The Company has certain commitments, contingencies and uncertainties
relating to its normal operations. Future capital requirements may vary
depending on such factors as the upgrade and replacement of existing equipment
and facilities, the cost of acquisition of businesses, brands and real estate
and other investments required to expand the business. Capital expenditures
through December 31, 1999 were approximately $900,000, which includes
equipment and facility upgrades in the Berkeley Brewery, upgrades in the
Seattle Alehouse and the installation of a new computer system. 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
reserves, together with cash from operations and borrowings under the line of
credit, will be sufficient for the Company's working capital needs.

The Company's future cash requirements and cash flow expectations are
closely related to its expansion plans. The Company generally expects to meet
future financing needs through cash on-hand, cash flow from operations and, to
the extent required and available, additional bank borrowings.

Year 2000

The Company did not experience any year 2000 computer programming issues
that would have significantly impaired the Company's operations as a result of
the turn of the century. The Company will continue to assess the potential
impact of the year 2000 computer processing issues on its management and
information systems. The Company believes that it has a prudent approach in
place to address these issues and is prepared to take remedial action, if
necessary. The approach includes assessing internal programs and equipment,
communicating with major customers and vendors with respect to the status of
their systems, evaluating facility-related issues and developing contingency
plans. This approach is designed to maintain an uninterrupted supply of goods
and services to and from the Company.

The Company has incorporated year 2000 programming modifications with an
overall upgrade in its computer systems. Early in 1999, the Company began a
project to improve its information systems by replacing existing business
software. The new system replaced all critical systems and approximately 90%
of all computer systems which the Company's assessment showed to be affected
by the year 2000 issue. The total cost of the Company's year 2000 project was
approximately $600,000, including the cost of installing the business
software. The project was completed by the end of the third quarter of fiscal
year 1999.

11
<PAGE>

The Company is in a continuous process of communicating with its major
customers and suppliers. This contact is designed to determine systems
compatibility and compliance. The Company did not experience any disruption in
the delivery of goods and services from its major suppliers due to year 2000
processing issues.

Risk Factors and Forward Looking Statements

Pyramid Breweries Inc. 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. Additional information concerning those and other factors is
contained in the Company's Securities and Exchange Commission filings
including its IPO prospectus.

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, there is evidence that 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. Certain states have laws
restricting or forbidding a combined pub and brewery. 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 will increase during 2000.

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,

12
<PAGE>

(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 and develops business in new geographic 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.

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.

Impact of Inflation

Although the Company has not attempted to calculate the effect of inflation,
management does not believe inflation has had a material effect on the
Company's results of operations. In the future, increases in costs and
expenses, particularly packaging, raw materials and labor costs may have a
significant impact on the Company's operating results to the extent that such
cost increases cannot be passed along to its customers.

Item 8 -- Financial Statements

Financial statements of Pyramid Breweries Inc. are as follows:

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.............................. 17
Balance Sheets as of December 31, 1999 and 1998....................... 18
Statements of Operations for the Years Ended December 31, 1999, 1998
and 1997............................................................. 19
Statements of Stockholders' Equity for the Years Ended December 31,
1999, 1998 and 1997.................................................. 20
Statements of Cash Flows for the Years Ended December 31, 1999, 1998
and 1997............................................................. 21
Notes to Financial Statements......................................... 22
</TABLE>

Item 9 -- Change In and Disagreements With Accountants on Accounting and
Financial Disclosure

None.

13
<PAGE>

PART III

Item 10 -- Directors and Executive Officers of the Company

For information with respect to the executive officers of the Registrant,
see Item 4A -- "Executive Officers of the Company" at the end of Part I of
this report. The information required by this Item concerning the Directors
and nominees for Director of the Company is incorporated herein by reference
to Pyramid Breweries Inc. Proxy Statement for its Annual Meeting of
Stockholders, to be held on May 4, 2000, to be filed with the Commission
pursuant to Regulation 14A.

Item 11 -- Executive Compensation

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 4, 2000, to be filed with the Commission pursuant to
Regulation 14A.

Item 12 -- Security Ownership of Certain Beneficial Owners and Management

Item 13 -- Certain Relationships and Related Transactions

PART IV

Item 14 -- Exhibits, Financial Statement Schedules, and Reports on Form 8-k

(a) Documents filed as part of this report are as follows:

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.

(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this Annual Report.

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.

14
<PAGE>

SIGNATURES

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.

Pyramid Breweries Inc.
(Registrant)

/s/ Richard M. Denmark
By: _________________________________
Richard M. Denmark
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.

/s/ Martin Kelly March 1, 2000
By: ______________________________________
Martin Kelly
President and Chief Executive Officer

/s/ Richard M. Denmark March 1, 2000
By: ______________________________________
Richard M. Denmark
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)

/s/ Kurt Dammeier March 1, 2000
By: ______________________________________
Kurt Dammeier
Chairman of the Board

/s/ Scott S. Barnum March 1, 2000
By: ______________________________________
Scott S. Barnum
Director

/s/ George Hancock March 1, 2000
By: ______________________________________
George Hancock
Director and Founder

/s/ Nancy Mootz March 1, 2000
By: ______________________________________
Nancy Mootz
Director

/s/ Thomas H. Schwalm March 1, 2000
By: ______________________________________
Thomas H. Schwalm
Director

/s/ John W. Stoddard March 1, 2000
By: ______________________________________
John W. Stoddard
Director

/s/ George C. Textor, Jr. March 1, 2000
By: ______________________________________
George C. Textor, Jr.
Director

/s/ Robert A. Toledo March 1, 2000
By: ______________________________________
Robert A. Toledo
Director

15
<PAGE>

PYRAMID BREWERIES INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................. 17
Balance Sheets as of December 31, 1999 and 1998.......................... 18
Statements of Operations for the Years Ended December 31, 1999, 1998 and
1997.................................................................... 19
Statements of Stockholders' Equity for the Years Ended December 31, 1999,
1998 and 1997........................................................... 20
Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and
1997.................................................................... 21
Notes to Financial Statements............................................ 22
</TABLE>

16
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of Pyramid Breweries Inc.:

We have audited the accompanying balance sheets of Pyramid Breweries Inc. as
of December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity and cash flows for each of the three years ended December
31, 1999. 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 generally accepted auditing
standards. 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, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years ended December 31, 1999 in conformity with
generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP

Seattle, Washington,
January 28, 2000

17
<PAGE>

PYRAMID BREWERIES INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 6,303,540 $ 5,245,134
Accounts receivable, net of allowance for doubtful
accounts of.......................................
$30,000 and $20,000, respectively.................. 1,102,155 1,003,789
Inventories........................................ 1,445,957 1,202,793
Prepaid expenses and other......................... 398,697 621,009
Deferred income taxes.............................. 556,831 444,216
----------- -----------
Total current assets............................. 9,807,180 8,516,941
Fixed assets, net.................................. 22,739,439 27,558,848
Deferred income taxes.............................. 377,961 490,576
Other.............................................. 785,020 865,286
----------- -----------
Total assets..................................... $33,709,600 $37,431,651
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................... $ 547,956 $ 218,964
Accrued expenses................................... 1,492,648 1,312,593
Refundable deposits................................ 465,184 462,747
Restructuring reserve.............................. -- 69,238
Dividends payable.................................. 329,735 --
----------- -----------
Total current liabilities........................ 2,835,523 2,063,542
Deferred rent...................................... 1,022,677 782,245
----------- -----------
Total liabilities................................ 3,858,200 $ 2,845,787
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, 10,000,000 shares authorized, none
issued............................................ -- --
Common stock, $.01 par value; 40,000,000 shares
authorized, 8,193,580 and 8,219,532 shares issued
and outstanding................................... 81,936 82,195
Additional paid-in capital......................... 34,982,946 35,036,869
Retained deficit................................... (5,213,482) (533,200)
----------- -----------
Total stockholders' equity....................... 29,851,400 34,585,864
----------- -----------
Total liabilities and stockholders' equity....... $33,709,600 $37,431,651
=========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

18
<PAGE>

PYRAMID BREWERIES INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Gross sales............................ $28,810,887 $27,326,473 $29,447,538
Less excise taxes...................... 1,734,780 1,672,099 1,971,413
----------- ----------- -----------
Net sales.............................. 27,076,107 25,654,374 27,476,125
Cost of sales.......................... 20,603,355 20,025,982 20,860,828
----------- ----------- -----------
Gross margin........................... 6,472,752 5,628,392 6,615,297
Selling, general and administrative
expenses.............................. 8,029,711 7,904,052 8,319,881
Impairment and restructuring charge.... 3,287,822 -- 1,600,000
----------- ----------- -----------
Operating loss......................... (4,844,781) (2,275,660) (3,304,584)
Other income (expense), net............ 494,234 580,254 (70,365)
----------- ----------- -----------
Loss before income taxes............... (4,350,547) (1,695,406) (3,374,949)
Benefit for income taxes............... -- 559,337 1,232,000
----------- ----------- -----------
Net loss............................... $(4,350,547) $(1,136,069) $(2,142,949)
=========== =========== ===========
Basic and diluted net loss per share... $ (0.53) $ (0.14) $ (0.26)
=========== =========== ===========
Weighted average shares outstanding.... 8,230,522 8,213,178 8,206,352
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

19
<PAGE>

PYRAMID BREWERIES INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Common Stock Additional Unrealized Retained Total
------------------ Paid-in Loss on (Deficit) Stockholders'
Shares Amount Capital Investments Earnings Equity
--------- ------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 8,204,656 $82,047 $35,124,037 $(184,350) $ 2,745,818 $37,767,552
Net loss............... -- -- -- -- (2,142,949) (2,142,949)
Shares issued.......... 10,053 100 28,517 -- -- 28,617
Shares repurchased and
retired............... (7,271) (73) (138,003) -- -- (138,076)
Realized loss on
investments........... -- -- -- 184,350 -- 184,350
--------- ------- ----------- --------- ----------- -----------
Balance, December 31,
1997................... 8,207,438 82,074 35,014,551 -- 602,869 35,699,494
Net loss............... -- -- -- -- (1,136,069) (1,136,069)
Shares issued.......... 12,094 121 22,318 -- -- 22,439
--------- ------- ----------- --------- ----------- -----------
Balance, December 31,
1998................... 8,219,532 82,195 35,036,869 -- (533,200) 34,585,864
Net loss............... -- -- -- -- (4,350,547) (4,350,547)
Dividends declared..... -- -- -- -- (329,735) (329,735)
Shares issued.......... 23,848 239 38,642 -- -- 38,881
Shares repurchased and
retired............... (49,800) (498) (92,565) -- -- (93,063)
--------- ------- ----------- --------- ----------- -----------
Balance, December 31,
1999................... 8,193,580 $81,936 $34,982,946 $ -- $(5,213,482) $29,851,400
========= ======= =========== ========= =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

20
<PAGE>

PYRAMID BREWERIES INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................... $(4,350,547) $(1,136,069) $(2,142,949)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization......... 2,783,679 2,622,238 3,097,926
Loss (gain) on sales of fixed assets.. 22,497 (27,782) 432,154
Impairment and restructuring charge... 3,218,584 (284,910) 1,454,148
Deferred income taxes................. -- (468,681) (1,286,338)
Realized loss on investments.......... -- -- 287,153
Deferred rent......................... 240,432 208,656 281,769
Changes in operating assets and
liabilities:
Accounts receivable................... (98,366) 287,892 (7,255)
Inventories........................... (243,164) (92,037) (2,507)
Prepaid expenses and other............ (212,192) (506,141) (546,722)
Income taxes receivable............... -- 250,071 39,491
Accounts payable and accrued
expenses............................. 509,047 (113,672) (896,761)
Refundable deposits................... 2,437 (11,953) (55,497)
----------- ----------- -----------
Net cash provided by operating
activities......................... 1,872,407 727,612 654,612
----------- ----------- -----------

INVESTING ACTIVITIES:
Acquisition of Thomas Kemper Soda
Company.............................. -- -- (575,802)
Acquisitions of fixed assets.......... (899,612) (1,586,218) (6,343,086)
Proceeds from sales of fixed assets... 139,793 688,050 473,849
Purchases of investments.............. -- -- (15,005,027)
Redemptions and sales of investments.. -- -- 26,380,066
----------- ----------- -----------
Net cash (used in) provided by
investing activities............... (759,819) (898,168) 4,930,000
----------- ----------- -----------

FINANCING ACTIVITIES:
Proceeds from sale of stock........... 38,881 22,439 28,617
Principal payments on long-term debt.. -- -- (382,389)
Shares repurchased and retired........ (93,063) -- (138,076)
----------- ----------- -----------
Net cash (used in) provided by
financing activities............... (54,182) 22,439 (491,848)
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents............................ 1,058,406 (148,117) 5,092,764
Cash and cash equivalents at beginning
of year................................ 5,245,134 5,393,251 300,487
----------- ----------- -----------
Cash and cash equivalents at end of
year................................... $ 6,303,540 $ 5,245,134 $ 5,393,251
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid......................... $ -- $ -- $ 42,756
=========== =========== ===========
Income taxes paid..................... $ -- $ -- $ 32,203
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

21
<PAGE>

PYRAMID BREWERIES INC.

NOTES TO FINANCIAL STATEMENTS

1. Nature of Operations and Significant Accounting Policies

The Company

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, 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.
Pyramid also manufactures a line of gourmet sodas under the Thomas Kemper Soda
Company label.

In March 1995, the Company opened the Seattle Brewery near downtown Seattle.
This brewery and 340-seat alehouse has an estimated annual production capacity
of 92,000 barrels as of December 31, 1999.

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 380-seat alehouse has an estimated annual beer
production capacity of 80,000 barrels as of December 31, 1999.

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 November 1997, the Kalama, Washington brewery was closed. A significant
portion of the Kalama production equipment was transferred to the Company's
Berkeley, California brewery. The Company sold the remaining equipment.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined by
the first-in- first-out method, and market represents the lower of replacement
cost or estimated net realizable value.

Fixed Assets

Fixed assets are stated at cost. Significant additions and improvements are
capitalized. Repairs and maintenance are expensed as incurred. Upon
disposition of fixed assets, gains and losses are reflected in the statements
of operations. Depreciation is provided using the straight-line method over
lives ranging from five 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 their 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.

22
<PAGE>

Preopening Costs

The Company accounts for preopening related to new restaurants in accordance
with Statement of Position (SOP) 98-5 "Recording the cost of Start-Up
Activities" and accordingly, there were no unamortized preopening costs at
December 31, 1999 and 1998. Prior to the adoption of SOP 98-5, preopening
costs related to new restaurants have historically been capitalized in other
assets and were amortized over a one-year period commencing from the time of
the restaurant opening date. Amortization of preopening costs totaled $0,
$114,168 and $475,725, respectively, for the years ended December 31, 1999,
1998 and 1997.

Package Design Costs

Package design costs relate to the development of product packaging and
labels and are capitalized in other current assets and amortized over a one-
year period. Net unamortized package design costs totaled $116,882 and
$288,483 at December 31, 1999 and 1998, respectively. Amortization of package
design costs totaled $432,082, $447,734 and $441,121, respectively, for the
years ended December 31, 1999, 1998 and 1997.

Goodwill

The excess of cost over fair value of the net assets of businesses acquired
is capitalized and amortized on a straight-line basis over 10 years. Net
unamortized goodwill of $575,125 and $655,381 at December 31, 1999 and 1998,
respectively is included in other assets. Amortization of goodwill totaled
$80,256, $80,256 and $66,880, respectively, for the years ended December 31,
1999, 1998 and 1997.

Income Taxes

The Company is subject to federal and state income taxes and has recognized
deferred taxes in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109 "Accounting for Income Taxes." SFAS No. 109 requires companies
subject to income taxes to adjust their deferred tax assets and liabilities
based on temporary differences between financial statement and tax basis of
assets of liabilities, using enacted tax rates in effect in the years in which
the differences are expected to reverse.

Realization of the total deferred tax assets representing tax loss and
credit carryforwards 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. There can be no assurance that the Company will meet its
expectations of future U.S. taxable income necessary to realize the recognized
deferred tax asset. As a result, the amount of the deferred tax assets
considered realizable could be reduced in the near and long term if estimates
of future taxable U.S. income are reduced. The Company will continue to
evaluate the realizability of the deferred tax assets quarterly by assessing
the need for and amount of a valuation allowance.

Earnings Per Share

Basic earnings per share (EPS) is computed based on weighted average shares
outstanding and excludes dilutive securities such as options and warrants.
Options to purchase approximately 800,700, 652,500 and 649,500 shares of
common stock were outstanding during the years ended December 31, 1999, 1998
and 1997, respectively, but were not included in the computation of diluted
EPS because the exercise price of the options were greater than the average
market price of the common shares.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the

23
<PAGE>

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.

2. Accounting for Impairment of Long-Lived Assets

The Company accounts for impairment of long-lived assets in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" which was issued in March 1995. SFAS No.
121 requires that long-lived assets be reviewed for impairment whenever events
or changes in circumstances indicate that the book value of the asset may not
be recoverable. In accordance with SFAS No. 121, the Company uses 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. During fiscal year 1999, the Company wrote down approximately
$3,288,000 of impaired long-lived assets. The write-down included $2,545,000
of brewing machinery and equipment, $720,000 of leasehold equipment and
$23,000 of other equipment. Based on the Company's expectation of future
discounted net cash flow, these assets have been written-down to their
estimated fair value.

3. Restructuring Charge

On October 29, 1997, the Company announced a restructuring of the Company's
marketing and brewery operations and recorded a $1,600,000 restructuring
charge. The restructuring included a refocus of marketing resources on Western
and Southwestern markets and the closure of the Kalama, Washington brewery.
The restructuring charge includes $1,100,000 related to the disposal of fixed
assets, $100,000 in severance payments, $215,000 in market realignment costs
and $185,000 in property leases and other plant closure costs. During 1999,
the final assets were sold or disposed of and resulted in approximately
$60,000 of surplus in the restructuring reserve which is reported as a
reduction in selling, general and administrative expenses in the Company's
statements of operations.

For the period from December 31, 1998 through the year ended December 31,
1999 the restructuring activity is as follows:

<TABLE>
<CAPTION>
Closeout
December 31, 1999 of December 31,
1998 Activity Reserve 1999
------------ -------- --------- ------------
<S> <C> <C> <C> <C>
Estimated proceeds from
sale of fixed assets...... $(700,000) $ -- $(700,000) $--
Net proceeds from sale of
fixed assets.............. 732,000 (32,000) 764,000 --
Assets held for sale....... 32,000 32,000 -- --
Severance payments......... (4,832) -- (4,832) --
Market realignment costs... 14,241 -- 14,241 --
Other closure costs........ (4,171) 9,715 (13,886) --
--------- -------- --------- ----
$ 69,238 $ 9,715 $ 59,523 $--
========= ======== ========= ====
</TABLE>

4. Investments

During 1997, the Company sold its investment portfolio, consisting primarily
of tax-exempt municipal bonds, and reinvested the proceeds in short-term
investments classified as cash and cash equivalents. Gross realized gains and
losses from the sale of investments during 1997 were $3,296 and $290,449,
respectively. For the purpose of determining gross realized gains and losses,
the cost of securities is based upon specific identification.

Investment income was approximately $322,000, $309,000 and $350,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. Investment income
is reported as a component of other income (expense), net in the Company's
statements of operations.

24
<PAGE>

5. Inventories

Inventories consist of the following:

<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Raw materials.......................................... $ 616,589 $ 618,302
Finished goods......................................... 829,368 584,491
---------- ----------
$1,445,957 $1,202,793
========== ==========
</TABLE>

Raw materials primarily include ingredients, flavorings and packaging, as
well as 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.

6. Fixed Assets

Fixed assets consist of the following:

<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Brewery and retail equipment....................... $13,969,210 $17,283,235
Furniture and fixtures............................. 825,048 618,910
Leasehold improvements............................. 13,357,641 13,909,636
Construction in progress........................... 56,494 340,514
Assets held for sale............................... 152,560 32,000
----------- -----------
28,360,953 32,184,295
Less accumulated depreciation...................... (5,621,514) (4,625,447)
----------- -----------
$22,739,439 $27,558,848
=========== ===========
</TABLE>

7. Accrued Expenses

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Salaries, wages and related accruals.................. $ 320,005 $ 314,849
Severance accrual..................................... 480,000 --
Barrel taxes.......................................... 102,092 98,775
Other accruals........................................ 590,551 898,969
---------- ----------
$1,492,648 $1,312,593
========== ==========
</TABLE>

8. Line of Credit

The Company has an agreement with a commercial bank for a line of credit.
Under the line of credit, the Company may borrow up to $10,000,000 for short-
term operating needs. The line of credit revolves through April 30, 2000,
during which time the required payments will be interest only. At that date,
any outstanding balance will be due in full. Borrowings under the line of
credit will incur interest, at the Company's option, at either the bank's
prime rate or at LIBOR plus 100 basis points. Up to $5,000,000 of the line of
credit may be used to finance acquisitions. Amounts used to finance
acquisitions may be converted to a four-year fully amortizing term loan, with
an additional option to fix the rate of interest at the bank's prime rate plus
125 basis points. The line of credit agreement contains provisions that
require the Company to maintain certain financial

25
<PAGE>

ratios and a minimum tangible net worth. Certain requirements in the line of
credit agreement were amended effective December 31, 1999. There were no
outstanding borrowings on the line of credit during fiscal year ended December
31, 1999.

The Company had no interest expense during fiscal 1999 and 1998. Interest
expense was approximately $38,000 in 1997. Interest expense is reported as a
component of other income (expense), net in the Company's statements of
operations.

9. Income Taxes

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

<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998 1997
---- -------- ----------
<S> <C> <C> <C>
Current............................................ $-- $ -- $ (54,337)
Deferred........................................... -- 559,337 1,286,337
---- -------- ----------
$-- $559,337 $1,232,000
==== ======== ==========
</TABLE>

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

<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Federal statutory rate.. 34.0 % 34.0 % 34.0 %
State taxes, net of
federal income tax
benefit................ 2.1 2.1 3.8
Tax-exempt investment
income................. -- -- --
Other, net.............. (1.4) (3.1) (1.3)
Valuation allowance..... (34.7) -- --
----- ---- ----
0.0 % 33.0 % 36.5 %
===== ==== ====
</TABLE>

Deferred income tax assets and are included in the balance sheet at December
31, 1999 and 1998, as follows:

<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Accelerated depreciation.......................... $(1,277,084) $(1,993,243)
Package design costs.............................. 167,400 215,167
Accrued vacation.................................. 65,034 74,569
Severance accrual................................. 170,833 --
Deferred rent..................................... 369,493 282,625
Restructuring charge.............................. -- 69,238
Net operating loss carryforwards.................. 1,846,085 1,565,726
Tax credit carryforwards.......................... 551,769 551,769
Other, net........................................ 202,122 168,941
Valuation allowance............................... (1,160,860) --
----------- -----------
$ 934,792 $ 934,792
=========== ===========
</TABLE>

At December 31, 1999, the Company had operating loss carryforwards for
federal income tax purposes of approximately $5,110,000, which are available
to offset future federal taxable income through 2019. In addition, the Company
had alternative minimum tax credit carryforwards of approximately $552,000,
which are available to reduce future federal income taxes over an indefinite
period.

26
<PAGE>

10. 401(k) Plan

The Company has a profit-sharing 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 13% of their eligible compensation to
the 401(k) plan. The Company generally matches employee contributions (that do
not exceed 10% of the employee's compensation) at the rate of 25%. The Company
may also make additional "profit-sharing" contributions. The Company's
"profit-sharing" contributions to the 401(k) plan are made at the sole
discretion of the Company. The Company's matching contributions for the years
ended December 31, 1999, 1998 and 1997, totaled $28,256, $16,354 and $35,700,
respectively.

11. Operating Leases

The Company leases its office, warehouse and plant facilities under
operating leases in Seattle and Berkeley. The Seattle brewery lease agreement
expires in 2004 and contains options to extend the lease term for three
additional five-year periods. The Seattle warehouse lease agreement expires in
2004 and contains options to extend the lease term for three additional five-
year periods. The Berkeley brewery lease agreement expires in 2010 and
contains options to extend the lease term for two additional five-year
periods. These lease agreements contain provisions for free rent periods and
scheduled rent increases. Accordingly, the Company has recorded deferred rent
of $1,022,677 and $782,245 at December 31, 1999 and 1998, respectively,
representing the pro rata rent which would have been due if equal payments had
been required under the lease terms. The Company also leases office, storage
and distribution facilities under month-to-month lease agreements.

At December 31, 1999, future minimum rental payments are as follows:

<TABLE>
<S> <C>
2000.................................. $ 475,104
2001.................................. 708,779
2002.................................. 816,204
2003.................................. 816,204
2004.................................. 666,285
Thereafter............................ 3,003,948
----------
$6,486,524
==========
</TABLE>

Total rent expense was approximately $777,000, $718,000 and $731,000 in
1999, 1998 and 1997, respectively.

12. Commitments and Contingencies

13. Cash Dividend

The Board of Directors announced on December 15, 1999, the declaration of a
$0.04 per common share dividend payable on January 14, 2000 to shareholders of
record on December 30, 1999. The cash dividend declared totaled approximately
$330,000 for all common stock outstanding as of the date of record.

14. Stock Buyback Plan

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. For the year ended December 31, 1999, the Company repurchased
49,800 shares of common stock.

27
<PAGE>

15. Major Customers and Financial Instruments

Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables and interest-bearing deposits. The
Company's interest-bearing deposits are placed with a major financial
institution. Wholesale distributors account for substantially all accounts
receivable; therefore, this concentration 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, 1999, 1998 and 1997, one customer
comprised approximately 24%, 21% and 18% of the Company's revenue,
respectively. Accounts receivable at December 31, 1999 and 1998 include
approximately $346,000 and $297,000, respectively, due from this customer.

16. Segment Information

The Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information", during 1998. Following the provisions of
SFAS No. 131, the Company is reporting segment information in the same format
as reviewed by the Company's management (the "Management Approach"), which is
organized around products and services. During 1999, management changed their
approach to managing the business by combining soda and beer operations into
the beverage operations segment. Also during 1999, the internal transfer
pricing of beverage products to the alehouse operations changed from wholesale
price to cost. Both of these changes have been applied retroactively for
segment presentation purposes. All segment information is presented here
except for the capital expenditures and total asset line items for 1997
because obtaining the information was impracticable.

Products and Services

The Company's reportable segments include beverage operations and alehouses.
Beverage operations include the production and sale of Pyramid Ales, Thomas
Kemper beers and Thomas Kemper soda products. The alehouse segment consists of
two full-service alehouses, which market and sell the full line of the
Company's beer and soda products as well as food and certain merchandise.

Factors used to identify reportable segments

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

Measurement of segment profit and segment assets

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. 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.

28
<PAGE>

Segment profit and segment assets are as follows:

<TABLE>
<CAPTION>
Beverage
Operations Alehouse Other Total
---------- -------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Revenues from external customers.. $21,560 $7,251 $ -- $28,811
Intersegment revenues............. 279 (279) -- --
Interest income................... -- -- 322 322
Depreciation and amortization..... 2,207 431 146 2,784
Impairment and restructuring
charge........................... 3,288 -- -- 3,288
Operating (loss) income........... (2,493) 626 (2,978) (4,845)
Capital expenditures.............. 350 337 213 900
Total assets...................... 18,558 3,454 11,698 33,710

Year ended December 31, 1998
Revenues from external customers.. $21,041 $6,285 $ -- $27,326
Intersegment revenues............. 261 (261) -- --
Interest income................... -- -- 309 309
Depreciation and amortization..... 2,128 409 85 2,622
Operating income (loss)........... 455 272 (2,993) (2,276)
Income tax benefit................ -- -- 559 559
Capital expenditures.............. 1,013 282 291 1,586
Total assets...................... 23,223 3,474 10,735 37,432

Year ended December 31, 1997
Revenues from external customers.. $23,097 $6,350 $ -- $29,447
Intersegment revenues............. 292 (292) -- --
Interest income (expense), net.... -- -- 314 314
Depreciation and amortization..... 2,321 678 99 3,098
Restructuring charge.............. 1,600 -- -- 1,600
Operating (loss) income........... (1,119) 376 (2,562) (3,305)
Income tax benefit................ -- -- 1,232 1,232
</TABLE>

Other

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 fixed assets which are presented by segment.

17. Related Party Transactions

From time to time, the Company has obtained loans from its stockholders.
These loans were unsecured, with interest paid semiannually or annually at
rates between 5.65% and 10%. There were no loans from stockholders during 1999
and 1998. During 1997, the Company had a loan payable to an officer and
director of the Company in the amount of $138,076. The loan and accrued
interest were repaid in full prior to December 31, 1997. Interest expense of
$21,636 was paid to related parties during the fiscal year ended December 31,
1997.

18. 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
1,315,000 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, depending on the option, vests over a period of one to five years.

29
<PAGE>

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, 1999 and
1998, 52,500 and 22,500 options have been granted, respectively. Each
outstanding option granted under this plan has a term of 10 years from the
date of grant and vests immediately.

The Company has adopted the disclosure-only provision of the SFAS No. 123
"Accounting for Stock-Based Compensation." Accordingly no compensation cost
has been recognized for options issued under the Employee and Director Plans
(the Plans). 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, 1999, 1998 and 1997, would have been as follows:

<TABLE>
<CAPTION>
December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net loss--as reported................ $(4,350,547) $(1,136,069) $(2,142,949)
=========== =========== ===========
Net loss--pro forma.................. $(5,168,734) $(1,606,807) $(3,233,670)
=========== =========== ===========
Net loss per share--as reported...... $ (0.53) $ (0.14) $ (0.26)
=========== =========== ===========
Net loss per share--pro forma........ $ (0.63) $ (0.20) $ (0.39)
=========== =========== ===========
</TABLE>

The fair value of options granted was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions: risk-
free interest rates ranging from 4.49% to 6.87%; expected option lives of six
to eight years; expected volatility of 40% to 75%; and expected future
dividends. The weighted-average fair value of options granted during the years
1999, 1998 and 1997 was $1.46, $1.76 and $1.49, respectively. The effect of
applying SFAS No. 123 for providing pro-forma disclosures is not likely to be
representative of the effects in future years.

Information with respect to the Plans follows:

<TABLE>
<CAPTION>
Weighted-
Share Subject Option Average
to Option Price Range Exercise Price
------------- -------------- --------------
<S> <C> <C> <C>
Options outstanding at
December 31, 1996............ 407,000 $ 4.75 - 19.00 $16.02
Granted..................... 289,500 $ 2.50 - 4.13 $ 2.89
Forfeitures................. (47,000) $10.75 - 19.00 $17.95
-------- -------------- ------
Options outstanding at
December 31, 1997............ 649,500 $ 2.50 - 19.00 $10.03
Granted..................... 254,000 $ 1.56 - 2.63 $ 2.54
Forfeitures................. (251,000) $ 3.09 - 19.00 $17.59
-------- -------------- ------
Options outstanding at
December 31, 1998............ 652,500 $ 1.56 - 19.00 $ 4.33
Granted..................... 305,000 $ 2.00 - 2.50 $ 2.05
Forfeitures................. (156,834) $ 2.56 - 19.00 $ 6.00
-------- -------------- ------
Options outstanding at
December 31, 1999............ 800,666 $ 1.56 - 10.75 $ 3.14
======== ============== ======
</TABLE>

Shares available for future grants at December 31, 1999 and 1998 totaled
495,000 and 287,500, respectively.

30
<PAGE>

Information about options outstanding at December 31, 1999 follows:

<TABLE>
<CAPTION>
Weighted-Average Weighted-
Options Remaining Options Average
Outstanding Contractual Life Exercisable Exercise Price
----------- ---------------- ----------- --------------
<S> <C> <C> <C>
55,000 77 months 55,000 $10.75
7,500 77 months 7,500 $12.25
10,500 84 months 10,500 $ 4.75
6,000 86 months 5,667 $ 4.13
7,500 89 months 7,500 $ 3.25
175,000 92 months 131,250 $ 2.88
7,500 94 months 5,625 $ 3.09
18,333 95 months 18,333 $ 2.50
7,500 101 months 7,500 $ 2.63
220,833 102 months 78,500 $ 2.56
5,000 105 months 1,667 $ 1.56
30,000 113 months 30,000 $ 2.13
200,000 116 months 22,300 $ 2.00
50,000 118 months 2,778 $ 2.00
------- -------
800,666 384,120
======= =======
</TABLE>

The Company had options exercisable of 215,783 with weighted-average
exercise prices ranging from $1.56 to $19.00 and options exercisable of
270,488 with weighted-average exercise prices ranging from $2.50 to $19.00 as
of December 31, 1998 and 1997, respectively.

19. Employee Stock Purchase Plan

The Company's Employee Stock Purchase Plan (the Purchase Plan) 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. Discounts related to employee stock purchases during 1999, 1998 and
1997 were insignificant. The total number of shares issuable under the plan is
500,000. There were 15,376, 12,094 and 10,053 shares issued under the Purchase
Plan during 1999, 1998 and 1997 at a weighted-average price of approximately
$1.36, $1.86 and $2.86 per share, respectively.

31
<PAGE>

20. Interim Financial Data (Unaudited)

The following table presents the results of operations for each of the four
quarters in 1999 and 1998. 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.

<TABLE>
<CAPTION>
1999 Quarters Ended 1998 Quarters Ended
------------------------------------------ ------------------------------------------
December 31 September 30 June 30 March 31 December 31 September 30 June 30 March 31
----------- ------------ ------- -------- ----------- ------------ ------- --------
(in thousands except per share amounts) (in thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross sales............. $ 7,035 $7,811 $7,738 $6,227 $6,423 $7,184 $7,510 $6,209
Less excise taxes....... 417 472 489 357 399 426 487 360
------- ------ ------ ------ ------ ------ ------ ------
Net sales............... 6,618 7,339 7,249 5,870 6,024 6,758 7,023 5,849
Cost of sales........... 5,088 5,522 5,364 4,629 4,896 5,190 5,183 4,757
------- ------ ------ ------ ------ ------ ------ ------
Gross margin............ 1,530 1,817 1,885 1,241 1,128 1,568 1,840 1,092
Selling, general and
administrative
expenses............... 2,374 1,948 1,897 1,811 1,739 1,982 2,025 2,157
Impairment and
restructuring charge... 3,288 -- -- -- -- -- -- --
------- ------ ------ ------ ------ ------ ------ ------
Operating loss.......... (4,132) (131) (12) (570) (611) (414) (185) (1,065)
Other income (expense)
net.................... 104 189 101 100 76 95 324 85
------- ------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes........... (4,028) 58 89 (470) (535) (319) 139 (980)
Benefit (provision) for
income taxes........... -- -- -- -- 195 84 (66) 346
------- ------ ------ ------ ------ ------ ------ ------
Net (loss) income....... $(4,028) $ 58 $ 89 $ (470) $ (340) $ (235) $ 73 $ (634)
Basic and diluted net
(loss) income per
share.................. $ (0.49) $ 0.01 $ 0.01 $(0.06) $(0.04) $(0.03) $ 0.01 $(0.08)
======= ====== ====== ====== ====== ====== ====== ======
Weighted average shares
outstanding............ 8,231 8,239 8,229 8,223 8,218 8,214 8,211 8,210
======= ====== ====== ====== ====== ====== ====== ======
</TABLE>

32
<PAGE>

EXHIBIT INDEX

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.

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
3.1(1) Amended and Restated Articles of Incorporation of Registrant
3.2(1) Form of Amended and Restated Bylaws of Registrant
4.1(1) Form of Common Stock Certificate
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) Employment Agreement between the Registrant and George Hancock
10.9(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
10.10(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
10.11 Employment Agreement between the Registrant and Richard Denmark
10.12 Employment Agreement and First Amendment between the Registrant and
Martin Kelly
10.13 Employment Agreement between the Registrant and Gary McGrath
23.1 Consent of Independent Public Accountants
27 Financial Data Schedule
</TABLE>
- --------
(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).

<PAGE>

EXHIBIT 10.11

EMPLOYMENT AGREEMENT BETWEEN THE REGISTRANT AND RICHARD DENMARK

This agreement is dated and made effective the 8th day of September, 1997
(the "Effective Date") between Richard Denmark ("Executive") and Pyramid
Breweries Inc., a Washington Corporation ("Company").
<PAGE>

1. Employment. Company employs Executive and Executive accepts employment
----------
on the terms and conditions in this agreement.

2. Duties. Executive is employed in the capacity of Chief Financial
------
Officer. In this capacity, Executive shall have primary responsibility for all
finance, planning, investor relations, accounting and reporting, human
resources, employee benefits, risk management, management information systems,
legal affairs, facilities and office management. Executive shall report directly
to, and take direction from, the Company's Chief Executive Officer and the Board
of Directors. Executive shall perform the duties customarily performed by a
chief financial officer, provided that Executive's precise duties may be
changed, extended or curtailed, from time to time, at the Chief Executive
Officer's direction, and Executive shall assume and perform the further
reasonable responsibilities and duties that the Chief Executive Officer may
assign from time to time.

3. Intensity of Effort; Other Business. Executive shall devote his entire
-----------------------------------
working time, attention, and efforts to Company's business and affairs, shall
faithfully and diligently serve Company's interests and shall not engage in any
business or employment activity that is not on Company's behalf (whether or not
pursued for gain or profit) except for (a) activities approved in writing in
advance by the Board and (b) passive investments that do not involve Executive
providing any advice or services to the businesses in which the investments are
made.

4. Term. The term of this agreement is of indefinite duration. As stated
----
in paragraph 9 below, this agreement and Executive's employment relationship may
be terminated at any time, with or without cause.

5. Compensation. Executive's compensation shall be as follows:
------------

(a) Executive's salary shall be $5,200 payable every two weeks (equal
to $135,000 on an annualized basis). Payday is the Wednesday following each
two-week period. Executive's salary shall be reviewed by the Chief Executive
Officer and adjusted as determined in his sole discretion.

(b) Executive will be eligible to receive a personal performance bonus
each year of up to an additional $15,000 as determined by the Chief Executive
Officer based upon performance criteria established in his discretion. For
calendar year 1997 and 1998, Executive shall be deemed to have earned the bonus
due under this section provided that Executive has not undertaken any of the
activities which are listed under Section 9(b) below which give the Company the
right to terminate Executive's employment for cause. Executive is eligible for
the personal performance bonus only if Executive remains employed by Company at
least through December 31 of each year. If Executive's employment ends prior to
December 31, Executive will be ineligible for any portion of the personal
performance bonus for that year, save that if the Company shall terminate
employment without cause, Executive shall be eligible for a pro-rata portion of
the personal performance bonus. The personal performance bonus, if any, shall
be paid on or before April 15 of the following year.

(c) Executive will also be eligible to receive a bonus each year of up
to an additional $10,000 as determined by the Board of Directors Compensation
Committee's review of the Company's performance in the past year compared to the
plan for that year. If Executive's employment ends prior to December 31,
Executive will be ineligible for any portion of the corporate performance bonus
for that year. The personal performance bonus, if any, shall be paid on or
before April 15 of the following year.

(d) Executive shall be eligible for stock options and/or other
incentive compensation only as stated in Non-Qualified Stock Option Agreements
dated September 8, 1997.

(e) Executive shall receive a car allowance of $300 per month, plus
reimbursement for gas purchased by employee for business use.

6. Benefit Plans. Executive (and qualifying immediate family members where
-------------
applicable) shall be eligible to participate in the Company's Employee Benefit
Package offered generally to employees, which currently includes health
insurance through Blue Cross of Washington, life and AD&D insurance, fifty
percent (50%) Company-payment of vision and dental, maternity leave, health
insurance continuation, sick leave, paid vacation, holidays, and 401(k). The
exact terms and conditions of the Company's benefits,
<PAGE>

including eligibility are governed by the benefit plans, not this agreement or
any summary provided to Executive.

7. Vacation and Sick Leave. Executive shall be entitled to four (4) weeks
-----------------------
(20 days) of paid vacation and five days of paid sick leave per calendar year
(prorated if this agreement begins and/or ends in the middle of a calendar
year). Up to two weeks (10 days) of vacation not used in any calendar year may
be carried over into the next calendar year; otherwise unused vacation is
forfeited at the end of the calendar year. Upon termination of employment for
any reason, Executive shall be paid for earned but unused vacation. Sick leave
may be accumulated up to a maximum of twenty (20) days. Unused sick leave is not
paid upon termination of employment, regardless of the reason.

8. Business Expenses. Executive is authorized to incur reasonable travel
-----------------
and entertainment expenses to promote Company's business. Company shall
reimburse Executive for those expenses. Executive shall provide to Company the
itemized expense account information that Company reasonably requests.

9. Termination. Executive's employment may be terminated as follows; in
-----------
which event Executive's compensation and benefits shall terminate except as
otherwise provided below:

(a) Without Cause or Good Reason. Either party may terminate
----------------------------
Executive's employment at any time by giving fourteen (14) calendar days'
advance written notice of termination to the other without the necessity of
cause or good reason.

(b) By Company for Cause. Company may terminate Executive's employment
--------------------
for cause, without advance written notice of termination, by giving written
notice of such termination. Any termination of Executive's employment for cause
must be approved by a majority of the Board other than Executive. Executive must
be given reasonable advance notice of the meeting at which his or her
termination is to be considered, and a reasonable opportunity to address the
Board. For purposes of this agreement "cause" means and is limited to
dishonesty, fraud, commission of a felony or of a crime involving moral
turpitude, harassment or illegal discrimination of any nature, including sexual
harassment, destruction, theft, or unauthorized use or distribution of Company
property or confidential information, fighting with an employee or customer or
vendor, intoxication at work, use of alcohol to an extent that it impairs
Executive's performance of his or her duties, use of illegal drugs at any time,
malfeasance or gross negligence in the performance of Executive's duties,
violation of law in the course of employment, Executive's failure or refusal to
perform his or her duties, Executive's failure or refusal to follow reasonable
instructions or directions, misconduct, or any material beach of Executive's
duties or obligations to Company.

(d) Permanent Disability. Company may terminate Executive's employment
--------------------
immediately if Executive becomes permanently disabled. For purposes of this
agreement Executive will be considered "permanently disabled" if, for a
continuous period of twenty-four (24) weeks or more, Executive has been unable
to perform the essential functions of the job because one or more mental or
physical illnesses and/or disabilities, provided that Company may grant
Executive unpaid leave if and to the extent that, in Company's judgment, doing
so is required by law.

10. Termination Payments.
--------------------

(a) Termination Without Cause.
-------------------------

eligible in the year of termination. For the same six-month period, Company
shall continue to provide at the Company's cost, the Company's medical benefits
to employee and qualifying family members. Such liquidated damages shall be
paid only if Executive executes a full and final general release of all claims
against Company (including Company's officers, directors, agents, employees and
assigns) arising out of Executive's employment relationship with Company.

(ii) In addition, if Company terminates Executive's employment
when neither cause nor permanent disability exists, but Company gives Executive
less than the fourteen (14) days' advance written notice called for above,
Company shall pay Executive, as liquidated damages and in lieu of all other
remedies to which Executive might be entitled arising out of Company's failure
to give fourteen (14) days' advance written notice, termination payments equal
to the additional salary Executive would have received if Company had given
Executive fourteen (14) day's advance written notice of termination.

(iii) Termination payments shall be paid out at Executive's
normal payroll rate on regular payroll days subject to normal payroll
deductions, commencing first with the termination payments called for by subpart
(ii), if any, followed by the termination payments called for by subpart (i).
Any reimbursable expenses incurred prior to termination will be paid immediately
upon termination.

(b) All Other Terminations. In all cases of termination or expiration
----------------------
of this agreement or of Executive's employment (including, but not limited to, a
termination of Executive by Company for cause of Executive's resignation of
employment), Executive's compensation and benefits shall terminate on the date
the employment ends and Executive shall not be entitled to any termination
payments or damages.

11. Confidentiality. Executive agrees that information not generally known
---------------
to the public to which Executive has been or will be exposed as a result of
Executive's employment by Company is confidential information that belongs to
Company. This includes information developed by Executive, alone or with others,
or entrusted to Company by its customers or others. Company's confidential
information includes, without limitation, brewing processes, brewing or bar
recipes, customer contacts and files, information related to Company's trade
secrets, know-how, procedures, purchasing, accounting, marketing, sales,
customers and employees. Executive will hold Company's confidential information
in strict confidence and will not disclose or use it except as authorized by
Company and for Company's benefit. Executive shall not obtain, keep, use secret
information that belongs to others, unless the party who has the rights to the
information expressly consents in writing in advance. Executive warrants that he
or she is not a party to any agreements, such as noncompetition agreements, that
would limit his or her ability to perform his or her duties for Company.

12. Possession of Materials. Executive agrees that upon conclusion of
-----------------------
employment or request by Company, Executive shall turn over to Company all
documents, files, office supplies and any other material or work product in
Executive's possession or control that were created pursuant to or derived from
Executive's services for Company.

13. Noncompetition. Executive agrees that Company has many substantial,
--------------
legitimate business interest that can be protected only by Executive agreeing
not to compete with Company under certain circumstances. These interests
include, without limitation, Company's contacts and relationships with its
customers, Company's reputation and goodwill in the industry, and Company's
rights in its confidential information. In consideration of the promises in this
agreement, together with the Stock Option Agreement, Executive therefore agrees
that for six (6) months after Executive's employment with Company ends,
regardless of the reason it ends, Executive shall not, directly or indirectly
(a) acquire, service, advise or conduct any business competitive with Company's
business in the brewing, manufacturing, packaging, marketing or distribution of
beer and sodas), or (b) be an employee, employer, consultant, officer, director,
partner, trustee or shareholder of more than five percent (5%) of the
outstanding common stock of any person or entity that acquires, services,
advises or conducts such business.

14. Nonraiding of Employees. Executive recognizes that Company's workforce
-----------------------
is a vital part of its business. Therefore, Executive agrees that for twelve
(12) months after Executive's employment
<PAGE>

with Company ends, regardless of the reason it ends, Executive will not solicit,
directly or indirectly, any employee to leave his or her employment with
Company. For purposes of this agreement, the phrase "shall not solicit, directly
or indirectly," includes, without limitation, that Executive (a) shall not
identify any Company employees to any third party as potential candidates for
employment, such as by disclosing the names, backgrounds and qualifications of
any Company employees; (b) shall not personally or through any other person
approach, recruit or otherwise solicit employees of Company to work for any
other employer; and (c) shall not participate in any preemployment interviews
with any person who was employed by Company while Executive was employed or
retained by Company.

15. Dispute Resolution. Company and Executive agree to resolve all
------------------
disputes arising out of their employment relationship by the following alternate
dispute resolution process: (a) Company and Executive agree to seek a fair and
prompt negotiated resolution; but if this is not successful, (b) all disputes
shall be resolved by binding arbitration; provided that during this process, (c)
at the request of either party, not made later than seventy-five (75) days after
the initial arbitration demand, the parties agree to attempt to resolve any
dispute by non-binding third-party intervention including either mediation or
evaluation or both (but without delaying the arbitration hearing date). By
entering into this contract, both parties give up their right to have the
dispute decided in court by a judge or jury. The provisions of the Washington
arbitration statute, Chapter 7.04 RCW, are incorporated herein to the extent not
inconsistent with the other terms of this agreement.

(a) Binding Arbitration. Any controversy or claim arising out of or
-------------------
connected with Executive's employment at Company, including but not limited to
claims for compensation or severance and claims of wrongful termination, age,
sex, racial or other discrimination, or civil rights violations shall be
determined by arbitration commenced in accordance with RCW 7.04.060, provided
that the total award by a single arbitrator (as opposed to a majority of three
arbitrators) shall not exceed Two Hundred Fifty Thousand Dollars ($250,000). If
either party assets in good faith that it is entitled to an award over Two
Hundred Fifty Thousand Dollars ($250,000), there shall be three (3) arbitrators.
The location of the arbitration shall be Seattle, Washington, or such other city
to which the parties may agree. If Company and Executive cannot agree on the
arbitrator(s), then the arbitrator(s) shall be selected by the administrator of
the American Arbitration Association (AAA) office nearest the city where the
arbitration is to be conducted. Each arbitrator shall be an attorney with at
least 15 years' experience in commercial law or judicial arbitration experience.
All statutes of limitations, which would otherwise be applicable, shall apply to
any arbitration proceeding hereunder. Any issue about whether a controversy or
claim is covered by this agreement shall be determined by the arbitrators).

(b) Procedures. The arbitration shall be conducted in accordance with
----------
this agreement using as appropriate the AAA Employment Dispute Resolution Rules
in effect on the date hereof. There shall be no discovery or dispositive motion
practice (such as motions for summary judgment or to dismiss or the like) except
that the arbitrators) shall authorize such discovery as may be shown to be
necessary to ensure a fair hearing, and no such discovery shall extend the time
limits contained herein. The arbitrator(s) shall not be bound by the rules of
evidence or of civil procedure, but rather may consider such writings and oral
presentations as reasonable business people would use in the conduct of their
day-to-day affairs, and may require both parties to submit some or all of their
respective cases by written declaration or such other manner of presentation as
the arbitrators) may determine to be appropriate. The parties agree to limit
live testimony and cross-examination to the extent necessary to ensure a fair
hearing on material issues.

(c) Hearing; Law; Appeal Limited. The arbitrator(s) shall take such
----------------------------
steps as may be necessary to hold a private hearing within one hundred twenty
(120) days of the initial request for arbitration and to conclude the hearing
within two (2) days; and the arbitrator(s)'s written decision shall be made not
later than fourteen (14) calendar days after the hearing. The parties agree that
they have included these time limits in order to expedite the proceeding, but
they are not jurisdictional, and the arbitrators) may for good cause allow
reasonable extensions or delays, which shall not affect the validity of the
award. The written decision shall contain a brief statement of the claim(s)
determined and the award made on each claim. In making the decision and award
the arbitrators) shall apply applicable substantive law. Absent fraud, collusion
or willful misconduct by an arbitrator, the award shall be final and judgment
may be
<PAGE>

entered in any court having jurisdiction thereof. The arbitrator(s) may award
injunctive relief or any other remedy available from a judge, including the
joinder of parties or consolidation of this arbitration with any other involving
common issues of law or fact or which may promote judicial economy, and may
award attorneys' fees and costs to the prevailing party, but shall not have the
power to award attorneys' fees and costs to the prevailing party, but shall not
have the power to award punitive or exemplary damages. The decision and award
of the arbitrators need not be unanimous; rather, the decision and award of two
(2) arbitrators shall be final.

(d) Injunctive Relief. In the case of a breach of any of Executive's
-----------------
obligations to Company, Company may request a court of competent jurisdiction to
issue such temporary or interim relief (including temporary restraining orders
and preliminary injunctions) as may be appropriate, either before arbitration is
commenced or pending the outcome of arbitration. No such request shall be a
waiver of the right to submit any claim or controversy to arbitration. Any
issues of law or fact, which arise in connection with such request, shall, at
Company's election, be determined by arbitration in accordance with subparagraph
(a) through (c) above.

16. Attorneys' Fees, Venue and Jurisdiction. In any lawsuit or arbitration
---------------------------------------
arising out of or relating to this agreement or Executive's employment,
including without limitation arising from any alleged tort or statutory
violation, the prevailing party shall recover reasonable costs and attorneys'
fees, including on appeal. Venue and jurisdiction of any lawsuit involving this
agreement or Executive's employment shall exist exclusively in state and federal
courts in King County, Washington, unless injunctive relief is sought by Company
and, in Company's judgment, that relief might not be effective unless obtained
in some other venue. The provisions of this section are subject to and do not
supersede the dispute resolution provisions described above.

17. Governing Law. This agreement shall be governed by the internal laws
-------------
of the state of Washington without giving effect to provisions thereof related
to choice of laws or conflict of laws.

18. Saving Provision. If any part of this agreement is held to be
----------------
unenforceable, it shall not affect any other part. If any part of this agreement
is held to be unenforceable as written, it shall be enforced to the maximum
extent allowed by applicable law. The confidentiality, possession of materials,
non-competition and nonraiding provisions of this agreement shall survive after
Executive's employment by Company ends, regardless of the reason it ends, and
shall be enforceable regardless of any claim Executive may have against Company.

19. Waiver. No waiver of any provision of this agreement shall be valid
------
unless in writing, signed by the party against whom the waiver is sought to be
enforced. The waiver of any breach of this agreement or failure to enforce any
provision of this agreement shall not waive any later breach.

20. Assignment; Successors. Company may assign its rights and delegate its
----------------------
duties under this agreement. Executive may not assign his or her rights or
delegate his or her duties under this agreement.

21. Binding Effect. This agreement is binding upon the parties and their
--------------
personal representatives, heirs, successors and assigns.

22. Counterparts. This agreement may be executed in any number of
------------
counterparts, each of which shall be an original and all of which, taken
together, shall constitute a single agreement.

23. Complete Agreement. This agreement, together with the Employee Stock
------------------
Option Agreements dated and September 8, 1997, is the final and complete
expression of the parties' agreement relating to Executive's employment. Only a
writing signed by both parties may amend this agreement; it may not be amended
orally or by course of dealing. The parties are not entering into this agreement
relying on anything not set out in this agreement. This agreement shall control
over any contrary policies or procedures of Company, whether in effect now or
adopted later. Company's policies and procedures that
<PAGE>

do not conflict with this agreement, whether in effect now or adopted later,
shall apply or not apply to Executive as determined by Company in its
discretion.

DATED as of the date first written above.

EXECUTIVE: /s/ RICHARD M. DENMARK
-------------------------

COMPANY: PYRAMID BREWERIES INC.

By /s/ GEORGE HANCOCK
----------------------
Its: Chief Executive Officer

<PAGE>

EXHIBIT 10.12

EMPLOYMENT AGREEMENT AND FIRST AMENDMENT BETWEEN THE REGISTRANT AND MARTIN KELLY

This agreement is dated and made effective the 9th day of August, 1999 (the
"Effective Date") between Martin Kelly ("Executive") and Pyramid Breweries Inc.,
a Washington Corporation ("Company").
<PAGE>

1. Employment. Company employs Executive and Executive accepts employment on
----------
the terms and conditions in this agreement.

2. Duties. Executive is employed in the capacity of President and Chief
------
Operating Officer. In this capacity, Executive shall have primary
responsibility for the planning and execution of all brewing, retailing,
sales and marketing operations. Executive shall report directly to, and
take direction from, the Company's Chief Executive Officer. Executive shall
perform the duties customarily performed by a president and chief operating
officer, provided that Executive's precise duties may be changed, extended
or curtailed, from time to time, at the Chief Executive Officer's
direction, and Executive shall assume and perform the further reasonable
responsibilities and duties so assigned from time to time.

3. Intensity of Effort; Other Business. Executive shall devote his entire
-----------------------------------
working time, attention, and efforts to Company's business and affairs,
shall faithfully and diligently serve Company's interests and shall not
engage in any business or employment activity that is not on Company's
behalf (whether or not pursued for gain or profit) except for (a)
activities approved in writing in advance by the Board and (b) passive
investments that do not involve Executive providing any advice or services
to the businesses in which the investments are made.

4. Term. The term of this agreement is of indefinite duration. As stated in
----
paragraph 9 below, this agreement and Executive's employment relationship
may be terminated at any time, with or without cause.

5. Compensation. Executive's compensation shall be as follows:
------------

(a) Executive's salary shall be $7,423.00 payable every two weeks (equal
to $193,000 on an annualized basis). Payday is the Friday following
each two-week period. Beginning in the year 2001, Executive's salary
shall be reviewed on January 1st each year and increased as determined
in the Chief Executive Officer's sole discretion.

(b) Executive will be eligible to receive a personal performance bonus
each year of up to an additional $30,000 as determined by the Chief
Executive Officer based upon performance criteria established in the
Quarterly Bonus Program at his discretion. Executive is eligible for
the personal performance bonus for any quarter only if Executive
remains employed by Company at least through the last day of each
quarter. If Executive's employment ends prior to the last day of a
quarter, Executive will be ineligible for any portion of the remaining
personal performance bonus for that year, save that if the Company
shall terminate employment without cause, Executive shall be eligible
for a pro-rata portion of that quarter's personal performance bonus.
The personal performance bonus, if any, shall be paid on or before the
end of the following quarter.

(c) Executive will also be eligible to receive a corporate bonus each year
of up to an additional $20,000 as determined by the Board of Directors
Compensation Committee's review of the Company's performance in the
past year compared to the budget plan for that year. If Executive's
employment ends prior to December 31, Executive will be ineligible for
any portion of the corporate performance bonus for that year. The
corporate performance bonus, if any, shall be paid on or before April
15 of the following year.

(d) Executive shall be eligible for stock options and/or other incentive
compensation only as stated in Non-Qualified Stock Option Agreements
between the Company and Executive.

(e) Executive shall receive a car allowance of $300 per month, plus
reimbursement for gas purchased by employee for business use.

6. Benefit Plans. Executive (and qualifying immediate family members where
-------------
applicable) shall be eligible to participate in the Company's Employee
Benefit Package offered generally to employees, which currently includes
health insurance through Blue Cross of Washington, life and AD&D insurance,
fifty percent (50%) Company-payment of vision and dental, maternity leave,
health insurance continuation, sick leave, paid vacation, holidays, and
401(k). The exact terms and
<PAGE>

conditions of the Company's benefits, including eligibility are governed by
the benefit plans, not this agreement or any summary provided to Executive.

7. Vacation and Sick Leave. Executive shall be entitled to four weeks (20
-----------------------
days) of paid vacation and five days of paid sick leave per calendar year
(prorated if this agreement begins and/or ends in the middle of a calendar
year). Up to three weeks (15 days) of vacation not used in any calendar
year may be carried over into the next calendar year; otherwise unused
vacation is forfeited at the end of the calendar year. Upon termination of
employment for any reason, Executive shall be paid for earned but unused
vacation. Sick leave may be accumulated up to a maximum of twenty (20)
days. Unused sick leave is not paid upon termination of employment,
regardless of the reason.

8. Business Expenses. Executive is authorized to incur reasonable travel and
-----------------
entertainment expenses to promote Company's business. Company shall
reimburse Executive for those expenses. Executive shall provide to Company
the itemized expense account information that Company reasonably requests.

9. Termination. Executive's employment may be terminated as follows; in which
-----------
event Executive's compensation and benefits shall terminate except as
otherwise provided below:

(a) Without Cause or Good Reason. Either party may terminate Executive's
---------------------
employment at any time by giving fourteen (14) calendar days' advance
written notice of termination to the other without the necessity of
cause or good reason.

(b) By Company for Cause. Company may terminate Executive's employment
--------------------
for cause, without advance written notice of termination, by giving
written notice of such termination. Any termination of Executive's
employment for cause must be approved by a majority of the Board other
than Executive. Executive must be given reasonable advance notice of
the meeting at which his or her termination is to be considered, and a
reasonable opportunity to address the Board. For purposes of this
agreement "cause" means and is limited to dishonesty, fraud,
commission of a felony or of a crime involving moral turpitude,
harassment or illegal discrimination of any nature, including sexual
harassment, destruction, theft, or unauthorized use or distribution of
Company property or confidential information, fighting with an
employee or customer or vendor, intoxication at work, use of alcohol
to an extent that it impairs Executive's performance of his or her
duties, use of illegal drugs at any time, malfeasance or gross
negligence in the performance of Executive's duties, violation of law
in the course of employment, Executive's failure or refusal to perform
his or her duties, Executive's failure or refusal to follow reasonable
instructions or directions, misconduct, or any material beach of
Executive's duties or obligations to Company.

(d) Permanent Disability. Company may terminate Executive's employment
--------------------
immediately if Executive becomes permanently disabled. For purposes of
this agreement Executive will be considered "permanently disabled" if,
for a continuous period of twenty-four (24) weeks or more, Executive
has been unable to perform the essential functions of the job because
one or more mental or physical illnesses and/or disabilities, provided
that Company may grant Executive unpaid leave if and to the extent
that, in Company's judgment, doing so is required by law.

10. Termination Payments.
--------------------

(a) Termination Without Cause.
-------------------------

which Executive is eligible in the year of termination. For the
same six-month period, Company shall continue to provide at the
Company's cost, the Company's medical benefits to employee and
qualifying family members. Such liquidated damages shall be paid
only if Executive executes a full and final general release of
----
all claims against Company (including Company's officers,
directors, agents, employees and assigns) arising out of
Executive's employment relationship with Company.

(ii) In addition, if Company terminates Executive's employment
when neither cause nor permanent disability exists, but Company
gives Executive less than the fourteen (14) days' advance written
notice called for above, Company shall pay Executive, as
liquidated damages and in lieu of all other remedies to which
Executive might be entitled arising out of Company's failure to
give fourteen (14) days' advance written notice, termination
payments equal to the additional salary Executive would have
received if Company had given Executive fourteen (14) days'
advance written notice of termination.

(iii) Termination payments shall be paid out at Executive's normal
payroll rate on regular payroll days subject to normal payroll
deductions, commencing first with the termination payments called
for by subpart (ii), if any, followed by the termination payments
called for by subpart (i). Any reimbursable expenses incurred
prior to termination will be paid immediately upon termination.

(b) All Other Terminations. In all cases of termination or expiration of
---------------------
this agreement or of Executive's employment (including, but not
limited to, a termination of Executive by Company for cause of
Executive's resignation of employment), Executive's compensation and
benefits shall terminate on the date the employment ends and Executive
shall not be entitled to any termination payments or damages.

11. Confidentiality/Unfair Competition. Executive agrees that Company has many
----------------------------------
substantial, legitimate business interests that can be protected only by
Executive agreeing not to compete with Company unfairly. These interests
include, without limitation, Company's contacts and relationships with its
supply sources, Company's reputation and goodwill in the industry, and
Company's rights in its confidential information. Executive agrees that
information not generally known to the public to which Executive has been
or will be exposed as a result of Executive's employment by Company is
confidential information that belongs to Company. This includes information
developed by Executive, alone or with others, or entrusted to Company by
its supply sources, customers or others. Company's confidential information
includes, without limitation, information relating to Company's trade
secrets, know-how, procedures, pricing, products, services, purchasing,
accounting, marketing, sales, supply sources, employees, and customers and
active prospects and their related needs. Executive will hold Company's
confidential information in strict confidence and will not disclose or use
it except as authorized by Company and for Company's benefit. Executive
also will not disparage Company or its business or services. Executive will
not, apart from good faith competition, interfere with Company's
relationships with its clients, employees, vendors, bankers or others.

13. Nonraiding of Employees. Executive recognizes that Company's workforce is
-----------------------
a vital part of its business. Therefore, Executive agrees that for twelve
(12) months after Executive's employment with Company ends, regardless of
the reason it ends, Executive will not solicit, directly or indirectly, any
employee to leave his or her employment with Company. For purposes of this
agreement, the phrase "shall not
<PAGE>

solicit, directly or indirectly," includes, without limitation, that
Executive (a) shall not identify any Company employees to any third party
as potential candidates for employment, such as by disclosing the names,
backgrounds and qualifications of any Company employees; (b) shall not
personally or through any other person approach, recruit or otherwise
solicit employees of Company to work for any other employer; and (c) shall
not participate in any pre-employment interviews with any person who was
employed by Company while Executive was employed or retained by Company.

14. Dispute Resolution. Company and Executive agree to resolve all disputes
------------------
arising out of their employment relationship by the following alternate
dispute resolution process: (a) Company and Executive agree to seek a fair
and prompt negotiated resolution; but if this is not successful, (b) all
disputes shall be resolved by binding arbitration; provided that during
this process, (c) at the request of either party, not made later than
seventy-five (75) days after the initial arbitration demand, the parties
agree to attempt to resolve any dispute by non-binding third-party
intervention including either mediation or evaluation or both (but without
delaying the arbitration hearing date). By entering into this contract,
both parties give up their right to have the dispute decided in court by a
judge or jury. The provisions of the Washington arbitration statute,
Chapter 7.04 RCW, are incorporated herein to the extent not inconsistent
with the other terms of this agreement.

(a) Binding Arbitration. Any controversy or claim arising out of or
-------------------
connected with Executive's employment at Company, including but not
limited to claims for compensation or severance and claims of wrongful
termination, age, sex, racial or other discrimination, or civil rights
violations shall be determined by arbitration commenced in accordance
with RCW 7.04.060, provided that the total award by a single
arbitrator (as opposed to a majority of three arbitrators) shall not
exceed Two Hundred Fifty Thousand Dollars ($250,000). If either party
asserts in good faith that it is entitled to an award over Two Hundred
Fifty Thousand Dollars ($250,000), there shall be three (3)
arbitrators. The location of the arbitration shall be Seattle,
Washington, or such other city to which the parties may agree. If
Company and Executive cannot agree on the arbitrator(s), then the
arbitrator(s) shall be selected by the administrator of the American
Arbitration Association (AAA) office nearest the city where the
arbitration is to be conducted. Each arbitrator shall be an attorney
with at least 15 years' experience in commercial law or judicial
arbitration experience. All statutes of limitations, which would
otherwise be applicable, shall apply to any arbitration proceeding
hereunder. Any issue about whether a controversy or claim is covered
by this agreement shall be determined by the arbitrator(s).

(b) Procedures. The arbitration shall be conducted in accordance with
----------
this agreement using as appropriate the AAA Employment Dispute
Resolution Rules in effect on the date hereof. There shall be no
discovery or dispositive motion practice (such as motions for summary
judgment or to dismiss or the like) except that the arbitrator(s)
shall authorize such discovery as may be shown to be necessary to
ensure a fair hearing, and no such discovery shall extend the time
limits contained herein. The arbitrator(s) shall not be bound by the
rules of evidence or of civil procedure, but rather may consider such
writings and oral presentations as reasonable business people would
use in the conduct of their day-to-day affairs, and may require both
parties to submit some or all of their respective cases by written
declaration or such other manner of presentation as the arbitrator(s)
may determine to be appropriate. The par-ties agree to limit live
testimony and cross-examination to the extent necessary to ensure a
fair hearing on material issues.

(c) Hearing; Law; Appeal Limited. The arbitrator(s) shall take such steps
----------------------------
as may be necessary to hold a private hearing within one hundred
twenty (120) days of the initial request for arbitration and to
conclude the hearing within two (2) days; and the arbitrator(s)'s
written decision shall be made not later than fourteen (14) calendar
days after the hearing. The parties agree that they have included
these
<PAGE>

time limits in order to expedite the proceeding, but they are not
jurisdictional, and the arbitrator(s) may for good cause allow
reasonable extensions or delays, which shall not affect the validity
of the award. The written decision shall contain a brief statement of
the claim(s) determined and the award made on each claim. In making
the decision and award the arbitrator(s) shall apply applicable
substantive law. Absent fraud, collusion or willful misconduct by an
arbitrator, the award shall be final and judgment may be entered in
any court having jurisdiction thereof. The arbitrator(s) may award
injunctive relief or any other remedy available from a judge,
including the joinder of parties or consolidation of this arbitration
with any other involving common issues of law or fact or which may
promote judicial economy, and may award attorneys' fees and costs to
the prevailing party, but shall not have the power to award attorneys'
fees and costs to the prevailing party, but shall not have the power
to award punitive or exemplary damages. The decision and award of the
arbitrators need not be unanimous; rather, the decision and award of
two (2) arbitrators shall be final.

(d) Injunctive Relief. In the case of a breach of any of Executive's
-----------------
obligations to Company, Company may request a court of competent
jurisdiction to issue such temporary or interim relief (including
temporary restraining orders and preliminary injunctions as may be
appropriate, either before arbitration is commenced or pending the
outcome of arbitration. No such request shall be a waiver of the right
to submit any claim or controversy to arbitration. Any issues of law
or fact, which arise in connection with such request, shall, at
Company's election, be determined by arbitration in accordance with
subparagraph (a) through (c) above,

15. Attorneys' Fees; Venue and Jurisdiction. In any lawsuit or arbitration
---------------------------------------
arising out of or relating to this agreement or Executive's employment,
including without limitation arising from any alleged tort or statutory
violation, the prevailing party shall recover reasonable costs and
attorneys' fees, including on appeal. Venue and jurisdiction of any lawsuit
involving this agreement or Executive's employment shall exist exclusively
in state and federal courts in King County, Washington, unless injunctive
relief is sought by Company and, in Company's judgment, that relief might
not be effective unless obtained in some other venue. The provisions of
this Section are subject to and do not supersede the dispute resolution
provisions described above.

16. Governing Law. This agreement shall be governed by the internal laws of
-------------
the state of Washington without giving effect to provisions thereof related
to choice of laws or conflict of laws.

17. Saving Provision. If any part of this agreement is held to be
----------------
unenforceable, it shall not affect any other part. If any part of this
agreement is held to be unenforceable as written, it shall be enforced to
the maximum extent allowed by applicable law. The confidentiality,
possession of materials, non-competition and nonraiding provisions of this
agreement shall survive after Executive's employment by Company ends,
regardless of the reason it ends, and shall be enforceable regardless of
any claim Executive may have against Company.

18. Waiver. No waiver of any provision of this agreement shall be valid unless
------
in writing, signed by the party against whom the waiver is sought to be
enforced. The waiver of any breach of this agreement or failure to enforce
any provision of this agreement shall not waive any later breach.

19. Assignment; Successors. Company may assign its rights and delegate its
----------------------
duties under this agreement. Executive may not assign his or her rights or
delegate his or her duties under this agreement.

20. Binding Effect. This agreement is binding upon the parties and their
--------------
personal representatives, heirs, successors and assigns.

21. Counterparts. This agreement may be executed in any number of
------------
counterparts, each of which shall be an original and all of which, taken
together, shall constitute a single agreement.
<PAGE>

22. Complete Agreement. This agreement, together with the Employee Stock
------------------
Option Agreement dated August 9, 1999, and the offer letter to
Executive dated June 18, 1999, is the final and complete expression of
the parties' agreement relating to Executive's employment. Only a
writing signed by both parties may amend this agreement; it may not be
amended orally or by course of dealing. The parties are not entering
into this agreement relying on anything not set out in this agreement.
This agreement shall control over any contrary policies or procedures
of Company, whether in effect now or adopted later. Company's policies
and procedures that do not conflict with this agreement, whether in
effect now or adopted later, shall apply or not apply to Executive as
determined by Company in its discretion.

DATED as of the date first written above.

EXECUTIVE: /s/ Martin Kelly
----------------

COMPANY: PYRAMID BREWERIES INC.

By /s/ GEORGE HANCOCK
----------------------------
Its: Chief Executive Officer
<PAGE>

FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
BETWEEN MARTIN KELLY AND PYRAMID BREWERIES INC.

2. Modification. Pursuant to paragraph 22 of the Employment Agreement dated
------------
August 9, 1999, (the "Original Agreement") between Pyramid Breweries Inc.,
a Washington corporation ("Company"), and Martin Kelly ("Executive")
requiring a writing signed by both parties to amend the Original Agreement,
effective this 16th day of February, 2000 (the "Effective Date"), Executive
and Company hereby agree to rescind in its entirety paragraph 5 of the
Original Agreement and replace the same with the following:

"5. Compensation. Executive's compensation will be as follows:
------------

(a) Salary. From December 9, 1999 through December 31, 2000, Company will
------
pay Executive a base salary in the gross amount of $8,076.92, less
authorized and required deductions, payable every two weeks (equal to
the gross amount of $210,000.00 on an annualized basis). Payday is the
Friday following each two-week period. Beginning in the year 2001,
Executive's salary will be reviewed January 1st each year and adjusted
as determined in the sole discretion of the Chairman of the Board of
Directors ("Chairman") and the Board of Directors Compensation
Committee ("Compensation Committee").

(b) Stock Options. Company grants Executive the option to purchase 50,000
-------------
shares of Company at a price equal to the average closing price of all
trading days from December 16, 1999, to December 31, 1999, in
accordance with the terms and conditions of the Fast Forward Program
and the Parties' January 3, 2000 Non-Qualified Stock Option Agreement,
copies of each of which are attached hereto and incorporated herein by
reference.

(1) Annual EBITDA Bonuses. If, during the period January 1, 2000
---------------------
through December 31, 2000, Executive achieves Company's Earnings
Before Interest Taxes Depreciation and Amortization ("EBITDA")
goal set forth in Company's Year 2000 Business Plan (the "Plan"),
a copy of which is attached hereto and incorporated herein by
reference, Company will pay Executive a one-time, lump sum EBITDA
Bonus in the gross amount of $25,000.00, less authorized and
required deductions. Further, if, during the same period, the
actual EBITDA results exceed Company's EBITDA budget by at least
10%, Company will pay Executive an additional one-time, lump sum
EBITDA Bonus in the gross amount of $21,000.00 (10% of base
salary), less authorized and required deductions. Further,
Company will pay Executive an additional lump sum EBITDA Bonus in
the gross amount of $2,100, less authorized and required
deductions, for each additional one percent (I%) that the actual
EBITDA results exceed Company's EBITDA budget during the same
period by greater than ten percent (10%).

(2) Annual Consolidated Net Sales Bonus. If, during the period
-----------------------------------
January 1, 2000 through December 31, 2000, Executive achieves
Company's Consolidated Net Sales goal set forth in the Plan,
Company will pay Executive a one-time, lump sum Consolidated Net
Sales Bonus in the gross amount of $12,500.00, less authorized
and required deductions.

(3) Quarterly Project Bonuses.
-------------------------

(i) First Quarter. If, prior to the end of the first
-------------
quarter of 2000, Executive performs, and presents to the
Board of Directors ("Board") in a form to be determined by
the Chairman and the Compensation Committee, a strategic
analysis with recommendations exploring and evaluating
whether Company's Alehouse Division should expand to
additional markets to support deeper penetration by
Company's core beer and soda business, Company will pay
Executive a one-time, lump sum Project Bonus in the gross
amount of $6,250.00, less authorized and required
deductions.

(ii) Second Quarter. If, prior to the end of the second
--------------
quarter of 2000, Executive performs, and presents to the
Board in a form to be determined by the Chairman and the
Compensation Committee, a strategic analysis with
recommendations exploring and evaluating whether new beer
and soda brand acquisitions will expand Company's current
revenue and profit base at a faster rate than organic growth
alone, Company will pay Executive a one-time, lump sum
Project Bonus in the gross amount of $6,250.00, less
authorized and required deductions.

(4) Eligibility and Payment. If Executive's employment ends prior to
-----------------------
December 31, 2000, in the event of any annual bonus, or the last
day of the quarter in the event of any quarterly bonus,
<PAGE>

Executive will be ineligible for any portion of that bonus;
provided, however, that if Company terminates Executive's
employment without cause, Company will pay Executive a pro-rata
share of that bonus. Quarterly bonuses, if any, will be paid on
or before the last day of the following quarter, and annual
bonuses, if any, will be paid on or before April 15, 2001.

(d) Car Allowance. Executive shall receive a car allowance of $300 per
-------------
month in addition to reimbursement for gas purchased by Executive for
business use."

3. Full Effect of Remaining Terms/Complete Agreement. Any and all terms and
conditions contained in the Original Agreement, other than those contained
in paragraph 5 and with the exception of paragraph 10 (a)(i) which is to be
amended to "termination payments and medical benefits equal to one year's
salary" (increased from six months), are unchanged by this Amendment and
remain in full effect. This Agreement, together with the Original Agreement
and exhibits attached hereto and incorporated herein by reference, is the
final and complete expression of the parties' amendment to the Original
Agreement.

DATED as of the Effective Date first written above.

EXECUTIVE: /s/ Martin Kelly
----------------

COMPANY: PYRAMID BREWERIES INC.

By /s/ GEORGE HANCOCK
-------------------------------
Its: Chief Executive Officer

<PAGE>

EXHIBIT 10.13

EMPLOYMENT AGREEMENT BETWEEN THE REGISTRANT AND GARY McGRATH

This agreement is dated and made effective the 25th day of October, 1999
(the "Effective Date") between Gary McGrath ("Executive") and Pyramid Breweries
Inc., a Washington Corporation ("Company").

1. Employment. Company employs Executive and Executive accepts employment
----------
on the terms and conditions in this agreement.

2. Duties. Executive is employed in the capacity of Vice President of
------
Sales. In this capacity, Executive shall have primary responsibility for
advising on and executing the Company's sales strategies and for attaining the
associated annual business plan goals. Executive shall report directly to, and
take direction from, the Company's Chief Operating Officer ("COO"), or in the
absence of a COO, the Chief Executive Officer. Executive shall perform the
duties customarily performed by a vice president of sales, provided that
Executive's precise duties may be changed, extended or curtailed, from time to
time, at the direction of the COO, and Executive shall assume and perform the
further reasonable responsibilities and duties that the COO may assign from time
to time.

5. Compensation. Executive's compensation shall be as follows:
------------

(a) Executive's salary shall be $4,807.69 payable every two weeks
(equal to $125,000 on an annualized basis). Payday is the Friday following each
two-week period. Executive's salary shall be reviewed on January 1st each year
and adjusted as determined in the COO's sole discretion.

(b) Executive will be eligible to receive a personal performance bonus
each year of up to an additional $20,000 as determined by the COO and based upon
performance criteria established in the quarterly Incentive Bonus Program at his
discretion. Executive is eligible for the personal performance bonus for any
quarter only if Executive remains employed by Company at least through the last
day of each quarter. If Executive's employment ends prior to the last day of a
quarter, Executive will be ineligible for any portion of the remaining personal
performance bonus for that year, save that if the Company shall terminate
employment without cause, Executive shall be eligible for a pro-rata portion of
that quarter's personal performance bonus. The personal performance bonus, if
any, shall be paid on or before the end of the following quarter.

(c) Executive will also be eligible to receive a corporate bonus each
year of up to an additional $ 10,000 as determined by the Board of Directors
Compensation Committee's review of the Company's performance in the past year
compared to the plan for that year. If Executive's employment ends prior to
December 31, Executive will be ineligible for any portion of the corporate
performance bonus for that year. The corporate performance bonus, if any, shall
be paid on or before April 15 of the following year.

(d) Executive shall be eligible for stock options and/or other
incentive compensation only as stated in Non-Qualified Stock Option Agreements
between the Company and Executive.

(e) Executive shall receive a car allowance of $475 per month, plus
reimbursement for gas purchased by employee for business use.
<PAGE>

7. Vacation and Sick Leave. Executive shall be entitled to accrue up to 4
-----------------------
weeks (20 days) of paid vacation and five days of paid sick leave per calendar
year (prorated if this agreement begins and/or ends in the middle of a calendar
year). Up to three weeks (15 days) of vacation not used in any calendar year may
be carried over into the next calendar year; otherwise unused vacation is
forfeited at the end of the calendar year. Upon termination of employment for
any reason, Executive shall be paid for earned but unused vacation. Sick leave
may be accumulated up to a maximum of twenty (20) days. Unused sick leave is not
paid upon termination of employment, regardless of the reason.

9. Termination. Executive's employment may be terminated as follows; in
-----------
which event Executive's compensation and benefits shall terminate except as
otherwise provided below:

(b) By Company for Cause. Company may terminate Executive's
--------------------
employment for cause, without advance written notice of termination, by giving
written notice of such termination. Any termination of Executive's employment
for cause must be approved by a majority of the Board other than Executive.
Executive must be given reasonable advance notice of the meeting at which his or
her termination is to be considered, and a reasonable opportunity to address the
Board. For purposes of this agreement "cause" means and is limited to
dishonesty, fraud, commission of a felony or of a crime involving moral
turpitude, harassment or illegal discrimination of any nature, including sexual
harassment, destruction, theft, or unauthorized use or distribution of Company
property or confidential information, fighting with an employee or customer or
vendor, intoxication at work, use of alcohol to an extent that it impairs
Executive's performance of his or her duties, use of illegal drugs at any time,
malfeasance or gross negligence in the performance of Executive's duties,
violation of law in the course of employment, Executive's failure or refusal to
perform his or her duties, Executive's failure or refusal to follow reasonable
instructions or directions, misconduct, or any material beach of Executive's
duties or obligations to Company.

10. Termination Payments.
--------------------
<PAGE>

(a) Termination Without Cause.
-------------------------

(i) If Company terminates Executive's employment when neither
cause nor permanent disability exists, Company shall pay Executive, as
liquidated damages and in lieu of all other remedies to which Executive might be
entitled arising out of the termination, termination payments equal to three
month's salary plus a pro rata share of any personal performance bonus for which
Executive is eligible in the quarter of termination. For the same three-month
period, Company shall continue to provide at the Company's cost, the Company's
medical benefits to employee and qualifying family members. Such liquidated
damages shall be paid only if Executive executes a full and final general
release of all claims against Company (including Company's officers, directors,
agents, employees and assigns) arising out of Executive's employment
relationship with Company.

11. Confidentiality/Unfair Competition. Executive agrees that Company has
----------------------------------
many substantial, legitimate business interests that can be protected only by
Executive agreeing not to compete with Company unfairly. These interests
include, without limitation, Company's contacts and relationships with its
supply sources, Company's reputation and goodwill in the industry, and Company's
rights in its confidential information. Executive agrees that information not
generally known to the public to which Executive has been or will be exposed as
a result of Executive's employment by Company is confidential information that
belongs to Company. This includes information developed by Executive, alone or
with others, or entrusted to Company by its supply sources, customers or others.
Company's confidential information includes, without limitation, information
relating to Company's trade secrets, know-how, procedures, pricing, products,
services, purchasing, accounting, marketing, sales, supply sources, employees,
and customers and active prospects and their related needs. Executive will hold
Company's confidential information in strict confidence and will not disclose or
use it except as authorized by Company and for Company's benefit. Executive also
will not disparage Company or its business or services. Executive will not,
apart from good faith competition, interfere with Company's relationships with
its clients, employees, vendors, bankers or others.

13. Nonraiding of Employees. Executive recognizes that Company's workforce
-----------------------
is a vital part of its business. Therefore, Executive agrees that for twelve
(12) months after Executive's employment with Company ends, regardless of the
reason it ends, Executive will not solicit, directly or indirectly, any
<PAGE>

employee to leave his or her employment with Company. For purposes of this
agreement, the phrase "shall not solicit, directly or indirectly," includes,
without limitation, that Executive (a) shall not identify any Company employees
to any third party as potential candidates for employment, such as by disclosing
the names, backgrounds and qualifications of any Company employees; (b) shall
not personally or through any other person approach, recruit or otherwise
solicit employees of Company to work for any other employer; and (c) shall not
participate in any pre-employment interviews with any person who was employed by
Company while Executive was employed or retained by Company.

14. Dispute Resolution. Company and Executive agree to resolve all
------------------
disputes arising out of their employment relationship by the following alternate
dispute resolution process: (a) Company and Executive agree to seek a fair and
prompt negotiated resolution; but if this is not successful, (b) all disputes
shall be resolved by binding arbitration; provided that during this process, (c)
at the request of either party, not made later than seventy-five (75) days after
the initial arbitration demand, the parties agree to attempt to resolve any
dispute by non-binding third-party intervention including either mediation or
evaluation or both (but without delaying the arbitration hearing date). By
entering into this contract, both parties give up their right to have the
dispute decided in court by a judge or jury. The provisions of the Washington
arbitration statute, Chapter 7.04 RCW, are incorporated herein to the extent not
inconsistent with the other terms of this agreement.

remedy available from a judge, including the joinder of parties or consolidation
of this arbitration with any other involving common issues of law or fact or
which may promote judicial economy, and may award attorneys' fees and costs to
the prevailing party, but shall not have the power to award attorneys' fees and
costs to the prevailing party, but shall not have the power to award punitive or
exemplary damages. The decision and award of the arbitrators need not be
unanimous; rather, the decision and award of two (2) arbitrators shall be final.

15. Attorneys' Fees, Venue and Jurisdiction. In any lawsuit or arbitration
---------------------------------------
arising out of or relating to this agreement or Executive's employment,
including without limitation arising from any alleged tort or statutory
violation, the prevailing party shall recover reasonable costs and attorneys'
fees, including on appeal. Venue and jurisdiction of any lawsuit involving this
agreement or Executive's employment shall exist exclusively in state and federal
courts in King County, Washington, unless injunctive relief is sought by Company
and, in Company's judgment, that relief might not be effective unless obtained
in some other venue. The provisions of this section are subject to and do not
supersede the dispute resolution provisions described above.

16. Governing Law. This agreement shall be governed by the internal laws
-------------
of the state of Washington without giving effect to provisions thereof related
to choice of laws or conflict of laws.

17. Saving Provision. If any part of this agreement is held to be
----------------
unenforceable, it shall not affect any other part. If any part of this agreement
is held to be unenforceable as written, it shall be enforced to the maximum
extent allowed by applicable law. The confidentiality, possession of materials,
non-competition and nonraiding provisions of this agreement shall survive after
Executive's employment by Company ends, regardless of the reason it ends, and
shall be enforceable regardless of any claim Executive may have against Company.

18. Waiver. No waiver of any provision of this agreement shall be valid
------
unless in writing, signed by the party against whom the waiver is sought to be
enforced. The waiver of any breach of this agreement or failure to enforce any
provision of this agreement shall not waive any later breach.

20. Binding Effect. This agreement is binding upon the parties and their
--------------
personal representatives, heirs, successors and assigns.

21. Counterparts. This agreement may be executed in any number of
------------
counterparts, each of which shall be an original and all of which, taken
together, shall constitute a single agreement.

22. Complete Agreement. This agreement, together with the Employee Stock
------------------
Option Agreements dated and October 25, 1999, is the final and complete
expression of the parties' agreement relating to Executive's employment. Only a
writing signed by both parties may amend this agreement; it may not be amended
orally or by course of dealing. The parties are not entering into this agreement
relying on anything not set out in this agreement. This agreement shall control
over any contrary policies or procedures of Company, whether in effect now or
adopted later. Company's policies and procedures that
<PAGE>

do not conflict with this agreement, whether in effect now or adopted later,
shall apply or not apply to Executive as determined by Company in its
discretion.

DATED as of the date first written above.

EXECUTIVE: /s/ Gary McGrath
-------------------------

COMPANY: PYRAMID BREWERIES INC.

By /s/ Martin Kelly
-------------------------------
Its: Chief Operating Officer

<PAGE>

EXHIBIT 23.1

Consent of Independent Public Accountants

As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into the Company's previously filed
Registration Statement, File No. 333-16311.

/s/ Arthur Andersen LLP

Seattle, Washington
March 20, 2000

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,303,540
<SECURITIES> 0
<RECEIVABLES> 1,132,155
<ALLOWANCES> 30,000
<INVENTORY> 1,445,957
<CURRENT-ASSETS> 9,694,565
<PP&E> 28,360,953
<DEPRECIATION> 5,621,514
<TOTAL-ASSETS> 33,709,600
<CURRENT-LIABILITIES> 2,835,523
<BONDS> 0
0
0
<COMMON> 81,936
<OTHER-SE> 29,769,464
<TOTAL-LIABILITY-AND-EQUITY> 33,709,600
<SALES> 27,076,107
<TOTAL-REVENUES> 28,810,887
<CGS> 20,603,355
<TOTAL-COSTS> 31,920,888
<OTHER-EXPENSES> 494,234
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,350,547)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,350,547)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,350,547)
<EPS-BASIC> (0.53)
<EPS-DILUTED> (0.53)

</TABLE>