UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-QSB

 

 

Check whether the issuer:  (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or 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   ý   No   o.

 

As of August 1, 2003, the issuer had outstanding 3,945,392 shares of common stock and 1,000,000 Class A Warrants.  The number of outstanding shares of common stock includes the shares issuable upon separation of the units, each consisting of one share of common stock and one redeemable Class A Warrant, sold in the issuer’s initial public offering.

 

Transitional Small Business Disclosure Format:

Yes   o   No   ý.

 

 

TABLE OF CONTENTS

 

PART I	FINANCIAL INFORMATION
ITEM 1	Financial Statements
	Condensed Balance Sheet as of June 29, 2003
	Condensed Statements of Operations for the thirteen and twenty-six weeks ended June 30, 2002 and June 29, 2003
	Condensed Statements of Cash Flows for the thirteen and twenty-six weeks ended June 30, 2002 and June 29, 2003
	Notes to Condensed Financial Statements
ITEM 2	Management’s Discussion and Analysis or Plan of Operation
ITEM 3	Controls and Procedures
PART II	OTHER INFORMATION
ITEM 1	Legal Proceedings
ITEM 2	Changes in Securities
ITEM 3	Defaults upon Senior Securities
ITEM 4	Submission of Matters to a Vote of Security Holders
ITEM 5	Other Information
ITEM 6	Exhibits and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS

 

i

 

PART I       FINANCIAL INFORMATION

 

ITEM 1  Financial Statements

 

GRANITE CITY FOOD & BREWERY LTD.

 

CONDENSED BALANCE SHEET

(Unaudited)

 

		June 29, 2003
ASSETS:
Current assets:
Cash		$	3,417,861
Inventory		102,447
Prepaids and other		171,332
Total current assets		3,691,640
Property and equipment, net		9,604,617
Intangible assets and other		341,862
Total assets		$	13,638,119
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable		$	329,135
Accrued expenses		644,631
Long-term debt, current portion		32,454
Capital lease obligations, current portion		273,931
Total current liabilities		1,280,151
Long-term debt, net of current portion		1,426,265
Capital lease obligations, net of current portion		3,558,748
Total liabilities		6,265,164
Shareholders’ equity:
Common stock, $0.01 par value, 90,000,000 shares authorized; 3,875,668 shares issued and outstanding		38,757
Preferred stock, $0.01 par value, 10,000,000 authorized; 55,600 Series A Convertible Preferred shares issued and outstanding		556
Additional paid-in capital		9,592,452
Stock dividends distributable		697
Accumulated deficit		(2,259,507		)
Total shareholders’ equity		7,372,955
Total liabilities and shareholders’ equity		$	13,638,119

 

See notes to condensed financial statements.

 

1

 

GRANITE CITY FOOD & BREWERY LTD.

 

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Thirteen Weeks Ended						Twenty-six Weeks Ended
		June 30, 2002			June 29, 2003			June 30, 2002			June 29, 2003
Restaurant revenues		$	3,162,279		$	3,111,026		$	6,276,619		$	5,981,186
Cost of sales:
Food, beverage and retail		908,625			909,316			1,815,378			1,728,198
Labor		1,076,435			1,061,028			2,151,562			2,046,861
Direct and occupancy		629,289			653,660			1,293,004			1,316,927
Total cost of sales		2,614,349			2,624,004			5,259,944			5,091,986
General and administrative		203,977			412,806			419,398			706,423
Depreciation and amortization		191,535			197,159			382,320			390,195
Operating income (loss)		152,418			(122,943		)	214,957			(207,418		)
Interest:
Income		312			23,581			470			46,882
Expense		(132,722		)	(121,727		)	(272,275		)	(245,175		)
Other income, net		(14,833		)	—			32,354			—
Net other expense		(147,243		)	(98,146		)	(239,451		)	(198,293		)
Net income (loss)		$	5,175		$	(221,089	)	$	(24,494	)	$	(405,711	)
Earnings (loss) per common share		$	0.00		$	(0.10	)	$	(0.01	)	$	(0.17	)
Earnings (loss) per common share, assuming dilution		$	0.00		$	(0.10	)	$	(0.01	)	$	(0.17	)
Weighted average shares outstanding		3,809,116			3,871,101			3,808,255			3,858,208
Weighted average shares outstanding, assuming dilution		3,882,238			3,871,101			3,808,255			3,858,208

 

See notes to condensed financial statements.

 

2

 

GRANITE CITY FOOD & BREWERY LTD.

 

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Twenty-six Weeks Ended
		June 30, 2002			June 29, 2003
Cash flows from operating activities:
Net loss		$	(24,494	)	$	(405,711	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		382,320			390,195
Decrease (increase) in:
Inventory		12,088			(72		)
Prepaids and other		(170,448		)	(64,675		)
Increase (decrease) in:
Accounts payable		32,996			(12,833		)
Accrued expenses		(85,858		)	(226,753		)
Net cash provided by (used in) operating activities		146,604			(319,849		)
Cash flows from investing activities:
Purchase of:
Property and equipment		(444,265		)	(908,056		)
Intangible assets and other		(1,827		)	(12,327		)
Net cash used in investing activities		(446,092		)	(920,383		)
Cash flows from financing activities:
Payments on capital lease obligations		(118,972		)	(129,057		)
Payments on long term-debt		(14,503		)	(15,331		)
Payment of dividends		—			(168,348		)
Proceeds from:
Related parties		200,000			—
Issuance of stock		10,087			1,448,987
Net cash provided by financing activities		76,612			1,136,251
Net decrease in cash		(222,876		)	(103,981		)
Cash, beginning		384,394			3,521,842
Cash, ending		$	161,518		$	3,417,861

 

See notes to condensed financial statements.

 

3

 

GRANITE CITY FOOD & BREWERY LTD.

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

Thirteen and twenty-six weeks ended June 30, 2002 and June 29, 2003

 

1.              Nature of business and basis of presentation:

 

Nature of business:

Granite City Food & Brewery Ltd. (the “Company”) was formed to develop and operate casual dining restaurants featuring on-premises breweries.  The Company is developing these restaurant-microbreweries, known as Granite City Food & Brewery®, in selected markets throughout the United States.  The theme is casual dining with a wide variety of menu items that are prepared fresh daily, combined with freshly brewed hand-crafted beers.  The Company produces its beer using a process called Fermentus Interruptus™, which is intended to maintain high beer quality while enhancing overall profitability by reducing unit-level brewing costs.  The first facility, located in St. Cloud, Minnesota, opened in July 1999.  The second facility, located in Sioux Falls, South Dakota, opened in December 2000 and a third facility located in Fargo, North Dakota, opened in November 2001.  Construction for new restaurants is currently underway in West Des Moines and Cedar Rapids, Iowa.  Additionally, the Company has signed a lease for a site in Davenport, Iowa, for its sixth restaurant.

 

The Company’s current expansion strategy focuses on development of restaurants in markets where management believes the Company’s concept will have broad appeal and attractive restaurant-level economics.

 

Interim financial statements:

The Company has prepared the condensed financial statements for the thirteen and twenty-six weeks ended June 30, 2002 and June 29, 2003 without audit by the Company’s independent auditors.  In the opinion of the Company’s management, all adjustments necessary to present fairly the financial position of the Company at June 29, 2003 and the results of operations and cash flows for the periods ended June 30, 2002 and June 29, 2003 have been made. Those adjustments consist only of normal and recurring adjustments.

 

Certain information and note disclosures normally included in the Company’s annual financial statements have been condensed or omitted.  These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 29, 2002, filed with the Securities and Exchange Commission on March 28, 2003.

 

The results of operations for the thirteen and twenty-six weeks ended June 29, 2003 are not necessarily indicative of the results to be expected for the entire year.

 

Earnings (loss) per share:

Basic earnings (loss) per common share is calculated by dividing net income (loss) less preferred stock dividends declared by the weighted average number of common shares outstanding.  Diluted earnings (loss) per common share assumes that outstanding common shares were increased by shares issuable upon exercise of stock options and warrants for which market price exceeds exercise price, less shares which could have been purchased by the Company with the related proceeds.  Calculations of the Company’s net earnings (loss) per common share for the thirteen and twenty-six weeks ended June 30, 2002 and June 29, 2003 are set forth in the following table:

 

4

 

		Thirteen Weeks Ended						Twenty-six Weeks Ended
		June 30, 2002			June 29, 2003			June 30, 2002			June 29, 2003
Net income (loss)		$	5,175		$	(221,089	)	$	(24,494	)	$	(405,711	)
Less dividends declared		—			(168,732		)	—			(265,081		)
Net income (loss) available to common shareholders		$	5,175		$	(389,821	)	$	(24,494	)	$	(670,792	)
Income (loss) per common share		$	0.00		$	(0.10	)	$	(0.01	)	$	(0.17	)
Income (loss) per common share, assuming dilution		$	0.00		$	(0.10	)	$	(0.01	)	$	(0.17	)
Weighted average shares outstanding		3,809,116			3,871,101			3,808,255			3,858,208
Weighted average shares outstanding, assuming dilution		3,882,238			3,871,101			3,808,255			3,858,208

 

2.              Stock compensation:

 

The Company accounts for its stock-based compensation awards using the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.  No compensation cost has been recognized for options issued to employees when the exercise price of the options granted is at least equal to the fair value of the common stock on the date of grant.  Had compensation cost been determined consistent with Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, the Company’s net income (loss) and net income (loss) per common share would have been changed to the following pro forma amounts:

 

		Thirteen Weeks Ended						Twenty-six Weeks Ended
		June 30, 2002			June 29, 2003			June 30, 2002			June 29, 2003
Net income (loss):
As reported		$	5,175		$	(221,089	)	$	(24,494	)	$	(405,711	)
Pro forma		$	(27,813	)	$	(294,559	)	$	(90,471	)	$	(620,724	)
Net income (loss) per common share
Basic and diluted as reported		$	(0.00	)	$	(0.10	)	$	(0.01	)	$	(0.17	)
Basic and diluted pro forma		$	(0.01	)	$	(0.12	)	$	(0.02	)	$	(0.23	)

 

The fair value of each option grant for the pro forma disclosure required by SFAS No. 123, as amended by SFAS No. 148, is estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions for the grants:

 

5

 

		2002		2003
Dividend yield		None		None
Expected volatility		101.4	%	78.6	%
Expected life of option		5 years		5-10 years
Risk-free interest rate		3.9	%	3.4	%

 

3.              Change in capitalization:

 

Issuance of preferred stock and warrants to purchase common stock:

During the fourth quarter of 2002, the Company conducted a private placement to accredited investors of Series A Convertible Preferred Stock and warrants to purchase common stock.  The Company sold 55,600 shares of preferred stock for aggregate gross proceeds of $5,560,000.  The outstanding preferred stock is convertible into an aggregate of 3,518,964 shares of common stock at a conversion price of $1.58 per share.  The preferred stock pays an 8% cumulative dividend in cash or in the Company’s common stock.  The Company may require conversion under certain circumstances.  The preferred stock was sold with five-year warrants to purchase an aggregate of 1,759,473 shares of common stock at an exercise price of $1.58 per share.  In connection with such placement, the Company issued its agents warrants to purchase an aggregate of 288,604 shares of common stock at an exercise price of $1.58 per share and paid its agents cash commissions aggregating $471,000.

 

Exercise of warrants:

As part of the sale of common stock in 1997 and 1998, the Company sold to its private placement agent, for $50, a stock purchase warrant for the purchase of 111,950 shares of common stock at $1 per share.  As of December 29, 2002, 78,150 of such warrants remained outstanding.  On February 19, 2003, affiliates of the private placement agent exercised 76,450 warrants on a cashless basis.  The remaining 1,700 warrants expired February 20, 2003.

 

On June 10, 2003, 15,822 of the 1,759,473 warrants sold with the Series A Convertible Preferred Stock, were exercised on a cashless basis.

 

Dividends:

On March 21, 2003, the Company authorized payment of dividends to holders of its preferred stock as of that date.  Such dividends aggregated $96,349 and were paid in cash on March 31, 2003.

 

On June 23, 2003, the Company authorized payment of dividends to holders of its preferred stock as of that date.  Such dividends were paid June 30, 2003 through the issuance of an aggregate of 69,724 shares of common stock and $36 cash in lieu of fractional shares.

 

6

 

ITEM 2                                Management’s Discussion and Analysis or Plan of Operation

 

This discussion and analysis contains various non-historical forward-looking statements within the meaning of Section 21E of the Exchange Act.  Although we believe that, in making any such statement, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.  When used in the following discussion, the words “anticipates,” “believes,” “expects,” “intends,” “plans,” “estimates” and similar expressions, as they relate to us or our management, are intended to identify such forward-looking statements.  You are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by the cautions and risks described herein.  Please refer to our Annual Report on Form 10-KSB for the fiscal year ended December 29, 2002, filed with the Securities and Exchange Commission on March 28, 2003, for additional factors known to us that may cause actual results to vary.

 

Overview

 

We operate three casual dining restaurants featuring on-premises breweries under the name Granite City Food & Brewery.  Our activities through June 1999 were related to the development of our restaurant-microbrewery concept and the development and financing of our first restaurant.  Our initial restaurant commenced operations in St. Cloud, Minnesota, in June 1999.  Our second restaurant, located in Sioux Falls, South Dakota, commenced operations in December 2000.  Our third restaurant, located in Fargo, North Dakota, opened in November 2001.  We developed these restaurants using the net proceeds from a private placement conducted in late 1997, our initial public offering in June 2000, financing in the form of long-term building and equipment leases, bank financing, and loans from a related party.

 

In the fourth quarter of 2002, we obtained financing through the private placement of convertible preferred stock and warrants to purchase common stock.  We plan to finance the development of additional restaurants in markets throughout the Midwest with the use of the proceeds from this financing.  We have entered into a multi-site development agreement whereby we will be provided assistance in site selection, construction management and financing for new Granite City Food & Brewery restaurants.  Under this agreement, we will lease each new restaurant from our developer.  We have begun construction in the West Des Moines and Cedar Rapids, Iowa markets where we plan to open our fourth and fifth restaurants in the fall of 2003.  Additionally, we have entered into a lease agreement for a site in the Davenport, Iowa market, where we anticipate opening our sixth restaurant in the first quarter of 2004.

 

We believe that our operating results will fluctuate significantly because of several factors, including the timing of new restaurant openings and related expenses, profitability of new restaurants, increases or decreases in comparable restaurant sales, general economic conditions, consumer confidence in the economy, changes in consumer preferences, competitive factors and weather conditions.

 

Restaurant revenues are comprised almost entirely of the sales of food and beverages.  Product costs include the costs of food, beverages and retail items.  Labor costs include direct hourly and management wages, taxes and benefits for restaurant employees.  Direct and occupancy costs include restaurant supplies, marketing costs, rent, utilities, real estate taxes, repairs and maintenance and other related costs.  General and administrative expenses are comprised of expenses associated with all corporate and administrative functions that support existing operations, management and staff salaries, employee benefits, travel, information systems and training and market research.  Depreciation and amortization include depreciation on capital expenditures.  Other income and expense includes primarily the cost of interest expense on debt and capital leases and interest income on invested assets

 

7

 

Results of Operations

 

The following table compares operating results expressed as a percentage of total revenue for the thirteen and twenty-six weeks ended June 30, 2002 and June 29, 2003.

 

		Thirteen Weeks Ended				Twenty-six Weeks Ended
		June 30, 2002		June 29, 2003		June 30, 2002		June 29, 2003
Restaurant revenues		100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales:
Food, beverage and retail		28.7		29.2		28.9		28.9
Labor		34.0		34.1		34.3		34.2
Direct and occupancy		19.9		21.0		20.6		22.0
Total cost of sales		82.6		84.3		83.8		85.1
General and administrative		6.5		13.3		6.7		11.8
Depreciation and amortization		6.1		6.3		6.1		6.5
Operating income (loss)		4.8		(3.9	)	3.4		(3.4	)
Interest:
Income		0.0		0.8		0.0		0.8
Expense		(4.2	)	(3.9	)	(4.3	)	(4.1	)
Other income, net		(0.5	)	—		0.5		—
Net other expense		(4.7	)	(3.1	)	(3.8	)	(3.3	)
Net income (loss)		0.1	%	(7.0	)%	(0.4	)%	(6.7	)%

 

Critical Accounting Policies

 

This discussion and analysis is based upon our financial statements, which were prepared in conformity with generally accepted accounting principles.  These principles require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  We believe our estimates and assumptions are reasonable; however, actual results and the timing of the recognition of such amounts could differ from those estimates.  We have identified the following critical accounting policies and estimates utilized by management in the preparation of our financial statements:

 

Property and equipment:

 

The cost of property and equipment is depreciated over the estimated useful lives of the related assets ranging from three to 20 years.  The cost of leasehold improvements is depreciated over the length of the related lease.  Depreciation is computed using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes.  Amortization of assets acquired under capital lease is included in depreciation expense.  Our accounting policies regarding property and equipment include certain management judgments regarding the estimated useful lives of such assets and the determination as to what constitutes enhancing the value of or increasing the life of existing assets.  These

 

8

 

judgments and estimates may produce materially different amounts of depreciation and amortization expense than would be reported if different assumptions were used.

 

We continually reassess our assumptions and judgments and make adjustments when significant facts and circumstances dictate.  Historically, actual results have not been materially different than the estimates we have made.

 

Results of Operations for the Thirteen and Twenty-six Weeks Ended June 30, 2002 and June 29, 2003

 

Revenue

 

We generated $3,162,279 and $3,111,026 of revenues during the second quarter of 2002 and 2003, respectively.  During the first half of 2002 we had revenues of $6,276,619 while during the first half of 2003 we had revenues of $5,981,186.  Due to increased demand fostered by publicity surrounding the opening of our Fargo location in late November 2001, we experienced a temporary period of high revenues known as the “honeymoon effect” during the first quarter of 2002.  The overall 4.7% decrease in revenues in the first half of the current fiscal year was due primarily to the honeymoon effect in the comparable period of 2002.

 

We anticipate that restaurant revenues will vary from quarter to quarter.  We anticipate seasonal fluctuations in restaurant revenues due in part to increased outdoor seating and generally favorable weather conditions at all locations during the summer months.  We expect the timing of new restaurant openings and the related honeymoon effect to cause fluctuations in restaurant revenues.  Additionally, consumer confidence in the economy and changes in consumer preferences may affect our future revenues.

 

Cost of Sales

 

Food, Beverage and Retail

 

Our food and beverage cost increased 0.5% as a percentage of revenues during the thirteen weeks ended June 29, 2003 compared to the thirteen-week period ended June 30, 2002.  These costs remained steady at 28.9% percent of revenue during the first half of 2002 and the first half of 2003.  We expect that our food and beverage costs will vary going forward due to numerous variables, including seasonal changes in food costs and guest preferences.  We periodically create new menu offerings in both our craftbrewed beers and our food based upon guest preferences.  Although such menu modifications may temporarily result in increased food and beverage cost, we are able to offset such increases with our weekly specials which provide variety to our guests at a great price value.  Our varieties of craftbrewed beer, which we can produce at lower cost than beers we purchase for resale, also enable us to keep our food and beverage costs low while fulfilling guest requests and building customer loyalty.  We expect that with the addition of future locations, increased purchasing power will further reduce our food and beverage costs as a percentage of revenues.  Additionally, as we add new units, we believe our brewing process, Fermentus Interruptus, will allow us to keep our high quality product intact while reducing the production cost, thereby enhancing overall profitability.

 

Labor

 

Our labor costs expressed as a percentage of revenues increased 0.1% during the first quarter of 2003 compared to the first quarter of 2002 and decreased 0.1% for the twenty-six weeks ended June 29, 2003 compared to the same period of 2002.  As our employees have become more seasoned, our labor

 

9

 

costs related to kitchen staff and training have been reduced.  This reduction has been offset by increased employee health insurance premiums and increased workers compensation insurance.

 

We expect that labor costs will vary as we add new locations.  Minimum wage laws, local labor laws and practices, as well as unemployment rates vary from state to state and will affect our labor costs, as will hiring and training expense at our new locations.  Our management believes that retention of good employees ensures high quality guest service and reduces hiring and training costs.  Hiring and training cost savings associated with increased staff experience are offset slightly by pay increases to retain this more experienced staff.

 

Direct and Occupancy

 

Our direct and occupancy expenses increased 1.1% as a percentage of revenues during the thirteen weeks ended June 29, 2003 compared to the thirteen weeks ended June 30, 2002.  During the first two quarters of 2003, direct and occupancy costs increased 1.4% as a percentage of revenues compared to the first two quarters of 2002. Operating supplies, rent and occupancy costs, repairs and maintenance and advertising expense represent the majority of our direct and occupancy expenses.  A substantial portion of these expenses is fixed or indirectly variable and, therefore, increased as a percent of revenue with the lower revenue base.  Increases in direct and operating expenses were primarily in the areas of utilities, property taxes and insurance.

 

General and Administrative

 

General and administrative expenses include salaries and benefits associated with our corporate staff that is responsible for overall restaurant quality, future expansion into new locations and financial controls and reporting.  Other general and administrative expenses include professional fees, office administration and centralized accounting system costs, and travel by our corporate management to the restaurant locations.  General and administrative expenses increased $208,829 from $203,977 during the second quarter of 2002 to $412,806 during the second quarter of 2003.  Such costs increased $287,025 during the first half of 2003 compared to the first half of 2002.  In order to retain core management and further build our infrastructure to facilitate growth, we incurred increased payroll and benefits related expenses in the first half of 2003.  As we have increased our corporate staff, we have incurred additional rent and office upkeep expenses.  Additionally, our travel related expenses have increased with the development of new sites for expansion.  From the inception of our company through the end of fiscal year 2002, our executive officers did not receive any monetary compensation from our company as we believe the options issued to these officers in 1999, 2001 and 2003 represented reasonable compensation for their services through March 30, 2003.  At a meeting held in February 2003, our board of directors established a $160,000 annual salary for our President and Chief Executive Officer which became effective April 1, 2003.  His salary increased our general and administrative expenses for the second quarter of 2003

 

We expect that general and administrative costs will continue to fluctuate as a percentage of restaurant revenues in the near term as we build our infrastructure to adequately sustain operations across multiple locations.  The anticipated additional restaurant revenues associated with further expansion are expected to result in greater economies of scale for our corporate expenses in the long-term.

 

10

 

Depreciation and Amortization

 

Depreciation and amortization expense increased $5,624 during the second quarter 2003 compared to the second quarter of 2002.  Depreciation and amortization expense increased $7,875 during the first half of 2003 compared to the first half of 2002.  As a percentage of revenues, depreciation and amortization expense increased 0.4% during the first half of 2003 compared to that of 2002.

 

Other Income and Expense

 

Interest expense net of interest income decreased $34,264 during the thirteen weeks ended June 29, 2003 compared to the similar period in 2002.  Interest expense net of interest income decreased $73,512 during the twenty-six weeks ended June 29, 2003 compared to the similar period in 2002.  Interest expense decreased due to the reduction of outstanding debt while interest income increased due to interest earned on proceeds from the private placement of our securities during the fourth quarter of 2002.  Other income and expense for the first half of 2002 included a loss on assets we replaced which had not been fully depreciated, as well as the proceeds awarded by a NASD Arbitration Panel related to a claim we filed in November 2000 against Equity Securities Investments, Inc., less related legal fees.

 

Liquidity and Capital Resources

 

We have required capital principally for the development, construction and opening of new restaurants.  To date, we have obtained gross proceeds aggregating approximately $11.0 million through the sales of our securities.  Additionally, we have obtained financing through building and equipment leases, long-term debt from an independent financial institution, and loans from New Brighton Ventures, Inc., an entity owned in part by our President and Chief Executive Officer.

 

Using the proceeds from our sale of Series A Convertible Preferred Stock, we intend to expand in markets where we believe our concept will have broad appeal and attractive restaurant-level economics.  To aid in our expansion, we entered into a multi-site development agreement in October 2002 with Dunham Capital Management L.L.C. (“Dunham”) for the development of restaurants.  Dunham is controlled by Donald A. Dunham, Jr., who is an affiliate of Brew Buddies, L.L.C. (“Brew Buddies”), our largest beneficial owner of securities.  Under this agreement, Dunham provides us assistance in site selection, construction management and financing for future Granite City Food & Brewery restaurants.  As of June 29, 2003, construction was in progress in West Des Moines and Cedar Rapids, Iowa and Dunham had secured a site for us in the Davenport, Iowa market.

 

During the twenty-six weeks ended June 29, 2003, the issuance of securities provided us $1,448,987 of net cash.  We used $319,849 in operating activities, $920,383 to purchase equipment, primarily for our West Des Moines location, paid dividends of $168,348 to holders of our preferred stock and made payments on our debt and capital leases aggregating $144,388.

 

During the twenty-six weeks ended June 30, 2002, our operating activities provided $146,604 of net cash.  Using proceeds from promissory notes we issued to a related party aggregating $200,000 in February and May 2002, $10,087 in proceeds from issuing common stock pursuant to the exercise of a stock option and warrants and the net cash provided by operations, we purchased $446,092 of assets, primarily for our Fargo location, and made payments on our debt and capital lease obligations aggregating $133,475.

 

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As part of our expansion strategy, we developed a prototype model for future restaurants.  Our prototypical restaurant will be approximately 8,700 square feet and will require an investment of approximately $3.5 million to $4.0 million for land, building and equipment.  We anticipate these costs will vary from one market to another based on real estate values, zoning regulations, labor markets and other variables.  Under the above referenced development agreement, we will provide funding for the initial purchase of furniture, fixtures and equipment and our pre-opening expenses, which we anticipate will aggregate approximately $1.0 million to $1.5 million per location.  Additionally, we will lease each new restaurant from our developer.

 

In January 2003, we entered into a 20-year net lease relating to the restaurant under construction in Cedar Rapids, Iowa and a 20-year net lease relating to the restaurant being developed in Davenport, Iowa.  Each lease was entered into under the terms specified in the development agreement with Dunham.  These restaurants will be constructed for us on areas ranging from approximately 1.7 to 2.8 acres on build-to-suit basis.  The annual rent at each location will be equal to 10.5% of the sum of the construction cost and land cost.  The term of each lease will commence when operations begin at the specified location and each may be extended at our option for up to five additional five-year periods on the same terms and conditions, except the rent may increase based on a formula using the Consumer Price Index during any such extension.

 

With the net proceeds raised through the sale of Series A Convertible Preferred Stock, management believes that we will have sufficient funds to pursue our expansion strategy over the next 9 to 15 months.  We are also considering various alternatives to obtain capital to fund additional expansion, including debt and equity financing, partnerships with investors or combinations thereof.  The amount of financing required for new restaurants depends upon the definitive locations, leasehold improvement costs, construction costs and the type of transactions pursuant to which we establish new locations.  We cannot assure you that the financing needed to pursue our expansion strategy will be available on terms acceptable or favorable to us, or at all.

 

Commitments and Contingent Liabilities

 

Operating and Capital Leases:

 

We have two land and building lease agreements expiring in 2019 and 2020 with renewable options for additional periods.  The building portions of these leases are classified as capital leases because their present value was greater than 90% of the estimated fair value at the beginning of the lease.  The land portions of these leases are classified as operating leases because the fair value of the land was more than 25% of the leased property at the inception of each lease.  Under these leases, we are required to pay additional percentage rent based upon restaurant sales.  As of June 29, 2003, future obligations relating to the land portion of these leases aggregated $3,423,336 plus percentage rent.  The scheduled rent increases for the land during the life of each lease are recognized on a straight-line basis.

 

In 2001, we entered into a 20-year operating lease for land upon which we built our third restaurant.  As of June 29, 2003, future obligations under the terms of the lease aggregated $1,323,800 plus percentage rent.  In January and April 2003, we entered into three separate 20-year net leases relating to future restaurants in West Des Moines, Cedar Rapids and Davenport, Iowa.  The annual rent for each lease will be equal to 10.5% of the sum of the construction cost and land cost.  The terms of these leases will commence when operations begin at each location.

 

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Personal Guaranties:

 

Certain of our directors have personally guaranteed the lease on two of our restaurants and the $1.5 million loan we obtained to finance our third restaurant.  In connection with the loan, we entered into an agreement concerning guaranty which provides, among other things, that such guarantors will be indemnified from any liabilities they may incur by reason of their guaranties of our indebtedness. The agreement contains various covenants, one of which requires us to use our best efforts to obtain a release of one individual’s guarantee obligation by January 1, 2006.  If we have not accomplished this, we are obligated to pay him a monthly guarantee fee in the amount of $1,000 until such release is obtained.  Additionally, our board of directors agreed to compensate each of the guarantors for their existing and possible future guaranties of our indebtedness.  Although the amount has not yet been determined, our board agreed that such compensation would be paid upon the initial payment of rent on our fourth restaurant lease.

 

Employment Agreement:

 

We have entered into an employment agreement with our President and Chief Executive Officer.  In lieu of a salary, we issued stock options to him in 1999, 2001 and 2003 as compensation for his services through March 30, 2003.  At a meeting held in February 2003, our board of directors established a $160,000 annual salary for him effective April 1, 2003.  Among other provisions, the employment agreement includes change in control provisions that would entitle him to receive severance pay equal to 18 months of salary if there is a change in control of our company and his employment terminates.  Based on his current salary, the maximum contingent liability under this agreement would be $240,000.

 

Development Agreement:

 

We have entered into a development agreement with Dunham for the development of our restaurants.  Dunham is controlled by Donald A. Dunham, Jr., who is an affiliate of Brew Buddies, our largest beneficial owner of securities.  The agreement gives Dunham the right to develop, construct and lease up to 22 restaurants for us prior to December 31, 2012.  We are not bound to authorize the construction of restaurants during that time period, but generally cannot use another developer to develop or own a restaurant as long as the development agreement is in effect.  We can use another developer if Dunham declines to build a particular restaurant, if the agreement is terminated because of a default by Dunham, or if our company is sold or merged into another company.  In the case of a merger or sale of our company, the development agreement may be terminated at such time as Dunham has completed seven restaurants under the agreement.  The development agreement provides for a cooperative process between Dunham and our company for the selection of restaurant sites and the development of restaurants on those sites, scheduling for the development and construction of each restaurant once a location is approved, and controls on the costs of development and construction using bidding and guaranteed maximum cost concepts.  The development agreement provides that restaurants will be leased to us on the basis of a triple net lease.  The rental rate of each lease will be calculated using a variable formula which is based on approved and specified costs of development and construction and an indexed interest rate.  The term of each lease is 20 years with five five-year options to renew.

 

Summary of Contractual Obligations:

 

The following table summarizes our future obligations under contractual agreements as of June 29, 2003 and the time frame within which payments on such obligations are due.  This table does not include amounts related to loan guarantee fees, employment contracts, percentage rent or the lease agreement for our West Des Moines, Cedar Rapids and Davenport, Iowa locations as such amounts have not yet been determined.

 

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		Payments due by period
Contractual Obligations		Total			Less than 1 year			1-3 years			3-5 years			More than 5 years
Long-term debt		$	1,458,720		$	16,071		$	70,489		$	1,372,160		$	—
Capital lease obligations		7,000,305			308,997			1,233,865			1,012,701			4,444,742
Operating lease obligations		4,758,272			131,973			525,538			530,818			3,569,943
Total Obligations		$	13,217,297		$	457,041		$	1,829,892		$	2,915,679		$	8,014,685

 

Qualitative and Quantitative Disclosures about Market Risk

 

Our company is exposed to market risk from changes in interest rates on debt and changes in commodity prices.

 

Changes in Interest Rate:

 

We are exposed to market risk from changes in interest rates relating to a lease for equipment under an agreement expiring in 2008.  As of June 15, 2004, we will be required to amortize approximately $264,100 of the then remaining balance at an interest rate of prime plus 2% for 24 additional months. At such time, our payments will increase if the prime rate is more than 8.5%.  Each percentage point above such rate would increase the total payments over the remaining life of the lease by approximately $3,000.  On November 20, 2004, we will be required to amortize approximately $416,600 of the then remaining balance at an interest rate of prime plus 2% for 42 additional months.  At such time, our payments will increase if the prime rate is more than 10.3%.  Each percentage point above such rate would increase the total payments over the remaining life of the lease by approximately $8,500.

 

In February 2007, we will have a balloon payment due of approximately $1,325,000 on the loan we obtained from an independent financial institution in July 2001.  Currently, this loan bears a fixed interest rate of 8.75%. If it becomes necessary to refinance such balloon balance, we may not be able to secure financing at the same interest rate.  The effect of a higher interest rate would depend upon the negotiated financing terms.

 

Changes in Commodity Prices:

 

Many of the food products we purchase are affected by commodity pricing and are, therefore, subject to unpredictable price volatility.   These commodities are generally purchased based upon market prices established with vendors.  Extreme fluctuations in commodity prices and/or long-term changes could have an adverse affect on us.  Substantially all of our food and supplies are available from several sources, which helps to control food commodity risks.  Additionally, we have the ability to increase menu prices, or vary the menu items offered, in response to a food product price increases.  If, however, competitive circumstances limit our menu price flexibility, margins could be negatively impacted.

 

Our company does not enter into derivative contracts either to hedge existing risks or for speculative purposes.

 

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Seasonality

 

We expect that our sales and earnings will fluctuate based on seasonal patterns.  We anticipate that our highest sales and earnings will occur in the second and third quarters due to the milder climate and availability of outdoor seating during those quarters in our existing and proposed markets.

 

Inflation

 

The primary inflationary factors affecting our operations are food, supplies and labor costs.  A large number of our restaurant personnel are paid at rates based on the applicable minimum wage, and increases in the minimum wage directly affect our labor costs.  In the past, we have been able to minimize the effect of these increases through menu price increases and other strategies.  To date, inflation has not had a material impact on our operating results.

 

ITEM 3           Controls and Procedures

 

We maintain a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed, is accumulated and communicated to management timely.  Within the 90-day period prior to the filing date of this periodic report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to our company required to be disclosed in our periodic filings with the SEC.

 

There were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of their most recent evaluation.

 

PART II

OTHER INFORMATION

 

ITEM 1           Legal Proceedings

 

Not applicable.

 

ITEM 2           Changes in Securities

 

(a)   Not applicable.

 

(b)   Not applicable.

 

(c)   On May 12, 2003, we entered into a financial advisory services agreement with First American Securities, Inc. ("FASI") pusuant to which FASI agreed to provide to our company, on a non-exclusive and as-requested basis, cuonsulting sevices with respect to financing, investor relations and related matters.  In consideration of such agreement, we issued to FASI five-year warrants to purchase an aggregate of 35,000 shares at excercise prices ranging from $2.85 to $5.40 per share, exercisable as follows:

 

 

On June 10, 2003, we issued 2,927 shares of common stock to each of Draft Co. and Raft Co., both accredited investors, upon the exercise of warrants originally issued to such holders on October 1, 2002, in connection with a private placement of Series A Convertible Preferred Stock and warrants.  Each warrant was exercisable at $1.58 per share for the purchase of 7,911 shares of common stock.  Each warrant contained provisions allowing the holders to convert the securities into common stock without any cash consideration in exchange for the surrender of the remaining shares of common stock otherwise purchasable upon exercise of the warrant.  The holders elected to exercise their warrants in this manner.  The net shares issued to each holder was determined based on the 10-day average closing price of our common stock of $2.508 from May 28, 2003 to June 10, 2003.

 

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The foregoing issuances were made in reliance upon the exemption provided in Section 4(2) of the Securities Act.  Certificates representing such securities contain restrictive legends preventing sale, transfer or other disposition, unless registered under the Securities Act.  Prior to the resale registration covering the shares issued to Draft Co. and Raft Co., they were restricted as to sale or transfer.  The securities issued to FASI are restricted as to sale or transfer.  The recipients of such securities received, or had access to, material information concerning our company, including, but not limited to, our reports of Form 10-KSB, Form 10-QSB and Form 8-K, as filed with the SEC.  No discount or commission was paid in connection with the issuance of warrants to FASI or the issuance of common stock upon the exercise of warrants held by Draft Co. and Raft Co.

 

(d)   Not applicable.

 

ITEM 3           Defaults upon Senior Securities

 

Not applicable.

 

ITEM 4           Submission of Matters to a Vote of Security Holders

 

Not applicable.

 

ITEM 5           Other Information

 

Not Applicable.

 

ITEM 6           Exhibits and Reports on Form 8-K

 

(a)   Exhibits

 

See “Index to Exhibits.”

 

(b)   Reports on Form 8-K

 

None.

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

		GRANITE CITY FOOD & BREWERY LTD.
Date:  August 8, 2003	By:		/s/ Monica A. Underwood
			Monica A. Underwood
			Interim Chief Financial Officer and Corporate Controller

 

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INDEX TO EXHIBITS

 

Exhibit Number		Description
31.1		Certification by Steven J. Wagenheim, President and Chief Executive Officer of the Company, pursuant to Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification by Monica A. Underwood, Interim Chief Financial Officer of the Company, pursuant to Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification by Steven J. Wagenheim, President and Chief Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification by Monica A. Underwood, Interim Chief Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

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