Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

 

----

 

**FORM 10-Q**

 

**x****               ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE QUARTERLY PERIOD ENDED MARCH 30, 2010**

 

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

 

**CommissionFile Number 000-29643**

 

**GRANITECITY FOOD & BREWERY LTD.**

(Exact Name ofRegistrant as Specified in Its Charter)

 

| **Minnesota**                      | ** ** | **41-1883639**       |
|------------------------------------|------------|----------------------|
| (State or Other  Jurisdiction      |       | (I.R.S. Employer     |
| of Incorporation  or Organization) |       | Identification  No.) |

 

**5402Parkdale Drive, Suite 101**

**Minneapolis,Minnesota 55416**

**(952)215-0660**

(Address ofPrincipal Executive Offices and Issuer’s

Telephone Number,including Area Code)

 

Indicate by check markwhether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x     No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 229.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).  Yes  o  No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  (Check one):

 

| Large  accelerated filer o              |   | Accelerated  filer o         |
|----------------------------------------------|--------|-----------------------------------|
|                                         |   |                              |
| Non-accelerated  filer o                |   | Smaller  reporting company x |
| (Do not check if  smaller reporting company) |   |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o     No x

 

Asof May 7, 2010, the issuer had outstanding 7,366,217****shares ofcommon stock.

 

 

 

----

Tableof Contents

 

**TABLE OFCONTENTS**

 
| ** **            | ** **                                                                                                                | **Page**   |
|-----------------------|---------------------------------------------------------------------------------------------------------------------------|------------|
| ** **            | ** **                                                                                                                | ** ** |
| **PART I**       | **FINANCIAL  INFORMATION**                                                                                                | 1          |
| ** **            | ** **                                                                                                                |       |
| ITEM 1                | Financial Statements                                                                                                      | 1          |
|                  |                                                                                                                      |       |
|                  | Condensed Consolidated Balance Sheets as of  March 30, 2010 and December 29, 2009                               | 1          |
|                  |                                                                                                                      |       |
|                  | Condensed Consolidated Statements of Operations for  the Thirteen Weeks ended March 30, 2010 and March 31, 2009 | 2          |
|                  |                                                                                                                      |       |
|                  | Condensed Consolidated Statements of Cash Flows for  the Thirteen Weeks ended March 30, 2010 and March 31, 2009 | 3          |
|                  |                                                                                                                      |       |
|                  | Notes to Condensed Consolidated Financial Statements                                                                      | 4          |
|                  |                                                                                                                      |       |
| ITEM 2                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                               | 16         |
|                  |                                                                                                                      |       |
| ITEM 3                | Quantitative  and Qualitative Disclosures about Market Risk                                                               | 27         |
|                  |                                                                                                                      |       |
| ITEM 4                | Controls and  Procedures                                                                                                  | 28         |
|                  |                                                                                                                      |       |
| **PART II**      | **OTHER INFORMATION**                                                                                                     | 28         |
| ** **            | ** **                                                                                                                |       |
| ITEM 1                | Legal Proceedings                                                                                                         | 28         |
|                  |                                                                                                                      |       |
| ITEM 1A               | Risk Factors                                                                                                              | 28         |
|                  |                                                                                                                      |       |
| ITEM 2                | Unregistered  Sales of Equity Securities and Use of Proceeds                                                              | 29         |
|                  |                                                                                                                      |       |
| ITEM 3                | Defaults  upon Senior Securities                                                                                          | 29         |
|                  |                                                                                                                      |       |
| ITEM 4                | (Removed and Reserved)                                                                                                    | 29         |
|                  |                                                                                                                      |       |
| ITEM 5                | Other Information                                                                                                         | 29         |
|                  |                                                                                                                      |       |
| ITEM 6                | Exhibits                                                                                                                  | 30         |
|                  |                                                                                                                      |       |
| **SIGNATURES**        |                                                                                                                      | 31         |
| ** **            |                                                                                                                      |       |
| **INDEX TO EXHIBITS** | 32                                                                                                                        |

 

i

----

Table of Contents

 

**PART I**                               FINANCIAL INFORMATION

 

**ITEM 1  Financial Statements**

 

**GRANITE CITY FOOD & BREWERY LTD.**

# **CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

** **
| ** **                                                                                                                     | ** ** | **March 30,** | ** ** | **December 29,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                     | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ASSETS:                                                                                                                        |       |               |       |                  |       |
| Current  Assets:                                                                                                               |       |               |       |                  |       |
| Cash  and cash equivalents                                                                                                     |       | $                  | 1,536,284  |                  | $          | 1,743,599 |   |
| Inventory                                                                                                                      |       | 889,812            |       | 832,135               |       |
| Prepaids  and other                                                                                                            |       | 400,496            |       | 563,284               |       |
| Total  current assets                                                                                                          |       | 2,826,592          |       | 3,139,018             |       |
|                                                                                                                           |       |               |       |                  |       |
| Prepaid  rent, net of current portion                                                                                          |       | 289,298            |       | 303,763               |       |
| Property  and equipment, net                                                                                                   |       | 50,011,973         |       | 51,336,414            |       |
| Intangible  and other assets                                                                                                   |       | 1,204,390          |       | 1,242,761             |       |
| Total  assets                                                                                                                  |       | $                  | 54,332,253 |                  | $          | 56,021,956 |   |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY:                                                                                    |       |               |       |                  |       |
| Current  liabilities:                                                                                                          |       |               |       |                  |       |
| Accounts  payable                                                                                                              |       | $                  | 2,506,319  |                  | $          | 2,497,858 |   |
| Accrued  expenses                                                                                                              |       | 5,308,935          |       | 6,300,053             |       |
| Accrued  exit or disposal activities, current portion                                                                          |       | 134,699            |       | 133,195               |       |
| Deferred  rent, current portion                                                                                                |       | 1,543,967          |       | 1,356,391             |       |
| Deferred  gain, current portion                                                                                                |       | 273,607            |       | 273,607               |       |
| Long-term  debt, current portion                                                                                               |       | 424,277            |       | 389,391               |       |
| Capital  lease obligations, current portion                                                                                    |       | 850,475            |       | 718,470               |       |
| Total  current liabilities                                                                                                     |       | 11,042,279         |       | 11,668,965            |       |
|                                                                                                                           |       |               |       |                  |       |
| Accrued  exit or disposal activities, net of current portion                                                                   |       | 2,019,224          |       | 2,005,468             |       |
| Deferred  rent, net of current portion                                                                                         |       | 3,669,934          |       | 3,398,193             |       |
| Deferred  gain, net of current portion                                                                                         |       | 1,923,771          |       | 1,991,859             |       |
| Long-term  debt, net of current portion                                                                                        |       | 1,952,426          |       | 2,122,120             |       |
| Capital  lease obligations, net of current portion                                                                             |       | 27,242,748         |       | 27,507,051            |       |
| Total  liabilities                                                                                                             |       | 47,850,382         |       | 48,693,656            |       |
| Shareholders’  equity:                                                                                                    |       |               |       |                  |       |
| Common  stock, $0.01 par value, 15,000,000 shares authorized; 7,366,217 shares issued  and outstanding at 3/30/10 and 12/29/09 |       | 73,662             |       | 73,662                |       |
| Preferred  stock, $0.01 par value, 10,000,000 shares authorized                                                                |       |               |       |                  |       |
| Additional  paid-in capital                                                                                                    |       | 58,454,782         |       | 58,409,379            |       |
| Accumulated  deficit                                                                                                           |       | (52,046,573        | )          | (51,154,741           | )          |
| Total  shareholders’ equity                                                                                               |       | 6,481,871          |       | 7,328,300             |       |
| Total  liabilities and shareholders’ equity                                                                               |       | $                  | 54,332,253 |                  | $          | 56,021,956 |   |

 

See notes to condensed consolidated financialstatements.

 

1

----

Tableof Contents

 

**GRANITE CITY FOOD & BREWERY LTD.**

# **CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

** **
| ** **                                  | ** ** | **Thirteen Weeks Ended** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|
| ** **                                  | ** ** | **March 30,**       | ** ** | **March 31,** | ** ** |
| ** **                                  | ** ** | **2010**                 | ** ** | **2009** | ** ** |
|                                        |       |                     |       |   |   |
| Restaurant  revenue                         |       | $                        | 22,239,363 |   | $ | 21,424,701 |   |
|                                        |       |                     |       |   |   |
| Cost  of sales:                             |       |                     |       |   |   |
| Food,  beverage and retail                  |       | 6,086,246                |       | 5,826,253 |   |
| Labor                                       |       | 7,692,523                |       | 7,531,642 |   |
| Direct  restaurant operating                |       | 3,227,571                |       | 3,193,754 |   |
| Occupancy                                   |       | 2,169,712                |       | 1,572,200 |   |
| Total  cost of sales                        |       | 19,176,052               |       | 18,123,849 |   |
|                                        |       |                     |       |   |   |
| Pre-opening                                 |       | —                   |       | 192,929 |   |
| General  and administrative                 |       | 1,556,003                |       | 2,064,316 |   |
| Depreciation  and amortization              |       | 1,476,976                |       | 1,706,577 |   |
| Exit  or disposal activities                |       | 131,601                  |       | 428,080 |   |
| (Gain)  loss on disposal of assets          |       | (48,523                  | )          | 9,101 |   |
| Operating  loss                             |       | (52,746                  | )          | (1,100,151 | ) |
|                                        |       |                     |       |   |   |
| Interest:                                   |       |                     |       |   |   |
| Income                                      |       | 299                      |       | 1,498 |   |
| Expense                                     |       | (839,385                 | )          | (1,630,958 | ) |
| Net  interest expense                       |       | (839,086                 | )          | (1,629,460 | ) |
|                                        |       |                     |       |   |   |
| Net  loss                                   |       | $                        | (891,832   | ) | $ | (2,729,611 | ) |
|                                        |       |                     |       |   |   |
| Loss  per common share, basic               |       | $                        | (0.12      | ) | $ | (1.01 | ) |
|                                        |       |                     |       |   |   |
| Weighted  average shares outstanding, basic |       | 7,366,217                |       | 2,699,642 |   |

 

See notes to condensedconsolidated financial statements.

 

2

----

Tableof Contents

 

**GRANITE CITY FOOD & BREWERY LTD.**

# **CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **Thirteen Weeks Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                 | ** ** | **March 30,**       | ** ** | **March 31,** | ** ** |
| ** **                                                                                 | ** ** | **2010**                 | ** ** | **2009** | ** ** |
|                                                                                       |       |                     |       |   |   |
| Cash  flows from operating activities:                                                     |       |                     |       |   |   |
| Net  loss                                                                                  |       | $                        | (891,832   | ) | $ | (2,729,611 | ) |
| Adjustments  to reconcile net loss to net cash provided by (used in) operating activities: |       |                     |       |   |   |
| Depreciation  and amortization                                                             |       | 1,435,377                |       | 1,693,742 |   |
| Other  amortization                                                                        |       | 41,599                   |       | 12,835 |   |
| Stock  warrant/option expense                                                              |       | 45,579                   |       | 117,908 |   |
| Non-cash  interest expense                                                                 |       | 6,604                    |       | — |   |
| (Gain)  loss on disposal of assets                                                         |       | (48,523                  | )          | 9,101 |   |
| Loss  on exit or disposal activities                                                       |       | 10,159                   |       | 295,085 |   |
| Deferred  rent                                                                             |       | 455,429                  |       | (52,920 | ) |
| Changes  in operating assets and liabilities:                                              |       |                     |       |   |   |
| Inventory                                                                                  |       | (57,677                  | )          | (100,711 | ) |
| Prepaids  and other                                                                        |       | 177,253                  |       | (120,790 | ) |
| Accounts  payable                                                                          |       | 120,827                  |       | (254,112 | ) |
| Accrued  expenses                                                                          |       | (991,118                 | )          | (866,280 | ) |
| Net  cash provided by (used in) operating activities                                       |       | 303,677                  |       | (1,995,753 | ) |
|                                                                                       |       |                     |       |   |   |
| Cash  flows from investing activities:                                                     |       |                     |       |   |   |
| Purchase  of:                                                                              |       |                     |       |   |   |
| Property  and equipment                                                                    |       | (104,750                 | )          | (196,662 | ) |
| Intangible  and other assets                                                               |       | (22,022                  | )          | (129,831 | ) |
| Net  cash used in investing activities                                                     |       | (126,772                 | )          | (326,493 | ) |
|                                                                                       |       |                     |       |   |   |
| Cash  flows from financing activities:                                                     |       |                     |       |   |   |
| Payments  on capital lease obligations                                                     |       | (132,298                 | )          | (597,550 | ) |
| Proceeds  from capital leases                                                              |       | —                   |       | 1,000,000 |   |
| Payments  on long-term debt                                                                |       | (137,524                 | )          | (124,689 | ) |
| Proceeds  from long-term debt                                                              |       | —                   |       | 800,000 |   |
| Net  costs from issuance of stock                                                          |       | (114,398                 | )          | — |   |
| Net  cash (used in) provided by financing activities                                       |       | (384,220                 | )          | 1,077,761 |   |
|                                                                                       |       |                     |       |   |   |
| Net  decrease in cash                                                                      |       | (207,315                 | )          | (1,244,485 | ) |
| Cash  and cash equivalents, beginning                                                      |       | 1,743,599                |       | 2,652,411 |   |
| Cash  and cash equivalents, ending                                                         |       | $                        | 1,536,284  |   | $ | 1,407,926 |   |
|                                                                                       |       |                     |       |   |   |
| Supplemental  disclosure of non-cash investing and financing activities:                   |       |                     |       |   |   |
| Land,  buildings and equipment acquired under long-term debt agreement                     |       | $                        | —     |   | $ | 2,855,116 |   |
| Property  and equipment and intangibles purchased and included in accounts payable         |       | $                        | 112,366    |   | $ | 56,260 |   |

 

See notes to condensed consolidated financialstatements.

 

3

----

Table of Contents

 

**GRANITE CITY FOOD & BREWERY LTD.**

** **

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

**Thirteen weeks ended March 30, 2010 and March 31,2009**

 

**1.**     **Summary of significant accounting policies**

 

Background

 

Granite City Food & Brewery Ltd. (the “Company”) develops andoperates Modern American casual dining restaurants known as Granite City Food &Brewery®.  The restaurant theme isupscale casual dining with a wide variety of menu items that are prepared freshdaily, combined with freshly brewed hand-crafted beers finished on-site.  The Company opened its first Granite Cityrestaurant in St. Cloud, Minnesota in July 1999 and has since expanded toother Midwest markets.  As of March 30,2010, the Company operated 26 restaurants in 11 states.  The Company also operates a centralized beerproduction facility which is used to provide raw material support to itsrestaurants to create consistent quality and operational efficiencies in theproduction of its proprietary beer.  TheCompany believes that this brewing process improves the economics ofmicrobrewing as it eliminates the initial stages of brewing and storage atmultiple locations.  In 2007, the Companywas granted a patent by the United States Patent Office for its brewingprocess.

 

Principlesof consolidation and basis of presentation

 

For the quarter ended March 30, 2010, the Company operated at alevel that will allow it to fund its existing operations.  However, the Company’s ability to continuefunding its operations and meet its debt service obligations continues todepend upon its operating performance, and more broadly, achieving budgetedrevenue and operating margins, both of which will be affected by prevailingeconomic conditions in the retail and casual dining industries and otherfactors, which may be beyond the Company’s control.  If revenue or margins, or a combination ofboth, decrease to levels unsustainable for continuing operations, or if theCompany chooses to develop additional locations, the Company will requireequity or debt financing to meet ongoing obligations.  The amount of any such required funding woulddepend upon the Company’s ability to generate working capital.  There can be no assurance that the Companywill obtain financing on favorable terms or at all.  If the Company raises additional capitalthrough the issuance and sale of equity securities, the securities may beissued at prices below the market price of its stock, and its shareholders maysuffer significant dilution.  Debtfinancing, if available, may involve significant cash payment obligations,covenants and financial ratios that restrict the Company’s ability to operateand grow its business, and would cause it to incur additional interest expenseand financing costs.  If cash flow fromoperations are insufficient to fund expected capital needs, or if the Company’sneeds are greater than anticipated and the Company is unable to obtainadditional capital, the Company will be required to restructure debtobligations.  The failure to reachagreements with creditors to restructure indebtedness, including leaseobligations, would have a material adverse effect upon the Company’s businessand results of operations.

 

The Company’s condensed consolidated financial statements include theaccounts and operations of the Company and its subsidiary corporation underwhich its four Kansas locations are operated. Fifty percent of the stock of the subsidiary corporation is owned by aresident of Kansas.  Granite CityRestaurant Operations, Inc., a wholly-owned subsidiary of the Company,owns the remaining 50% of the stock of the subsidiary corporation.  The resident-owner of the stock of thatentity has entered into a buy-sell agreement with the subsidiary corporationproviding, among other things, that transfer of the shares is restricted andthat the shareholder must sell his shares to the subsidiary corporation uponcertain events, or any event that disqualifies the resident-owner from owningthe shares under applicable laws and regulations of the state.  The Company has entered into a masteragreement with the subsidiary corporation that permits the operation of therestaurants and leases to the subsidiary corporation the Company’s property andfacilities.  The subsidiary corporationpays all of its operating expenses and obligations, and the Company retains, asconsideration for the operating arrangements and the lease of property andfacilities, all the net profits, as 

 

4

----

Tableof Contents

 

defined, if any, from such operations. The foregoing ownership structure was set up to comply with thelicensing and ownership regulations related to microbreweries within the stateof Kansas.  The Company has determinedthat such ownership structure will cause the subsidiary corporation to betreated as a variable interest entity in which the Company has a controllingfinancial interest for the purpose, pursuant the Financial Accounting StandardsBoard’s (“FASB”) accounting guidance on accounting for variable interestentities.* *Assuch, the subsidiary corporation is consolidated with the Company’s financialstatements and the Company’s financial statements do not reflect a minorityownership in the subsidiary corporation. Also included in the Company’s condensed consolidated financialstatements are other wholly-owned subsidiaries. All references to the Company in these notes to the condensedconsolidated financial statements relate to the consolidated entity, and allintercompany balances have been eliminated.

 

Inthe opinion of management, all adjustments, consisting of normal recurringadjustments, which are necessary for a fair statement of the Company’sfinancial position as of March 30, 2010, and its results of operations forthe interim periods ended March 30, 2010 and March 31, 2009, havebeen included.

 

The balance sheet at December 29, 2009 has been derived from theaudited financial statements at that date, but does not include all of theinformation and notes required by generally accepted accounting principles forcomplete financial statements.  Certain information and note disclosuresnormally included in the Company’s annual financial statements have beencondensed or omitted.  These condensedfinancial statements should be read in conjunction with the financialstatements and notes thereto included in the Company’s Annual Report on Form 10-Kfor the fiscal year ended December 29, 2009, filed with the Securities and ExchangeCommission (“SEC”) on March 22, 2010.

 

The results ofoperations for the thirteen weeks ended March 30, 2010 are not necessarily indicative of theresults to be expected for the entire year.

 

Related parties

 

DHW Leasing, L.L.C. (“DHW”) became the beneficial owner ofapproximately 63.4% of the Company’s common stock in October 2009.  The members of DHW are Donald A. Dunham, Jr.and Charles J. Hey.  Mr. Dunham, whois also the sole member of Dunham Capital Management, LLC (“DCM”) and 70% ownerof Dunham Equity Management, LLC (“DEM”), became one of the Company’s directorsin October 2009.  DHW, DCM and DEMare collectively, with Mr. Dunham, referred to herein as the “DunhamEntities.”  As of March 30, 2010, Mr. Dunhambeneficially owned approximately 64.3% of the Company’s common stock, includingthe shares held by DHW.  DCM and DEM areentities that either are the landlord or the general partner in various limitedpartnerships that own real estate leased to the Company.  Mr. Dunham, as an individual, also ownsa limited partnership interest in one of the limited partnerships that own realestate leased to the Company.

 

Use of estimates

 

Thepreparation of financial statements in conformity with generally acceptedaccounting principles in the United States of America and regulations of theSEC requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosures of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenue and expense during the reporting period.  Significant estimates include estimatesrelated to asset lives and gift card liability. Actual results could differ from these estimates.

 

Revenuerecognition

 

Revenueis derived from the sale of prepared food and beverage and select retailitems.  Revenue is recognized at the timeof sale and is reported on the Company’s consolidated statements of operationsnet of sales taxes collected.  Revenuederived from gift card sales is recognized at the time the gift card isredeemed.  Until the redemption of giftcards occurs, the outstanding balances on such cards are included in accruedexpenses in the accompanying consolidated balance sheets.  The Company periodically recognizes gift cardbreakage which represents the portion of its gift card obligation for whichmanagement believes the likelihood 

 

5

----

Tableof Contents

 

ofredemption by the customer is remote, based upon historical redemptionpatterns.  Such amounts are included as areduction to general and administrative expense.

 

Cash and cash equivalents

 

The Company considers all highly liquid instruments with originalmaturities of three months or less to be cash equivalents.

 

Stock-basedcompensation

 

The Company measures and recognizes all stock-based compensation underthe fair value method using the Black-Scholes option-pricing model.  Share-based compensation expense recognizedis based on awards ultimately expected to vest, and as such, it is reduced forestimated or actual forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary,in subsequent periods if actual forfeitures differ from those estimates.  The Company used the following assumptions within theBlack-Scholes option-pricing model for the first quarter of 2010 and 2009:

 
| ** **                                | ** ** | **Thirteen Weeks Ended** |
|-------------------------------------------|------------|--------------------------|
| ** **                                | ** ** | **March 30, 2010**  | ** ** | **March 31, 2009** |
| Weighted average  risk-free interest rate |       | 3.80% - 3.85%            |   | 2.25% - 2.91% |
| Expected life of  options                 |       | 10 years                 |   | 10 years |
| Expected stock  volatility                |       | 95.53% - 95.62%          |   | 66.30% - 74.01% |
| Expected dividend yield                   |       | None                     |   | None |

 

Net loss per share

 

Basic net loss per share is computed based on the weighted averagenumber of shares of common stock outstanding during the fiscal year.  Diluted net loss per share is not presentedsince the effect would be anti-dilutive due to the losses.  Calculations of the Company’s net loss percommon share for the quarters ended March 30, 2010 and March 31,2009 reflect the Company’s January 2010 one-for-six share combination andare set forth in the following table:

 
| ** **                                  | ** ** | **Thirteen Weeks Ended** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|
| ** **                                  | ** ** | **March 30, 2010**  | ** ** | **March 31, 2009** | ** ** |
| Net  loss                                   |       | $                        | (891,832   | ) | $ | (2,729,611 | ) |
| Loss  per common share, basic               |       | $                        | (0.12      | ) | $ | (1.01 | ) |
| Weighted  average shares outstanding, basic |       | 7,366,217                |       | 2,699,642 |   |

 

Recently issuedaccounting standards

 

In June 2009, the FASB issued new accounting guidance which amendscertain guidance for determining whether an entity is a variable interestentity and modifies the methods allowed for determining the primary beneficiaryof a variable interest entity.  Theamendments include: (1) the elimination of the exemption for qualifyingspecial purpose entities, (2) a new approach for determining who shouldconsolidate a variable-interest entity, and (3) changes to when it isnecessary to reassess who should consolidate a variable-interest entity.  This guidance is effective for the firstannual reporting period beginning after November 15, 2009, with earlieradoption prohibited.  The adoption ofthis guidance did not impact the Company’s condensed consolidated financialstatements.

 

InMay 2009, the FASB issued new accounting guidance which establishesgeneral standards of accounting for and disclosure of events that occur afterthe balance sheet date, but before the financial statements are issued oravailable to be issued (“subsequent events”). This guidance requires disclosure of the date through which the entityhas evaluated subsequent events and the basis for that date.  For public entities, this is the date thefinancial statements are issued.  Thisguidance does not apply to subsequent events or transactions 

 

6

----

Tableof Contents

 

thatare within the scope of other GAAP and will not result in significant changesin the subsequent events reported by the Company.  This guidance became effective for interim orannual periods ending after June 15, 2009. In February 2010, the FASB issued Accounting Standards Codification(ASC) No. 2010-09 that rescinded the requirement for public companies todisclose the date through which subsequent events were evaluated.

 

InApril 2009, the FASB issued new accounting guidance related to interimdisclosures about the fair values of financial instruments.  This guidance requires disclosures about thefair value of financial instruments for interim reporting periods, as well asannual reporting periods and is effective for all interim and annual reportingperiods ending after June 15, 2009. The adoption of this guidance did not impact the Company’s condensedconsolidated financial statements.

 

**2.**     **Fair value of financialinstruments**

 

At March 30, 2010 and March 31, 2009, the fair value of cashand accounts payable approximates their carrying value due to the short-termnature of the instruments. The fair value of the capital lease obligations andlong-term debt is estimated at its carrying value based upon current ratesavailable to the Company.

 

**3.**              **Reverse stock split**

 

OnDecember 29, 2009, the Company’s board of directors approved a one-for-sixshare combination of its common stock which became effective on January 13,2010.  As a result of this reverse stocksplit, every six shares of the Company’s common stock that were issued andoutstanding as of January 13, 2010 were automatically combined into oneissued and outstanding share without any change in the par value of suchshares, and the number of authorized but unissued shares of the Company’scommon stock was proportionally reduced. A proportionate adjustment was also made to the Company’s outstandingstock options and warrants.  Nofractional shares were issued in connection with this reverse stock split, butrather shareholders who were entitled to fractional shares received cash inlieu of receiving fractional shares.  Allreferences within this document to loss per share reflect this reverse stocksplit.  Additionally, the number ofcommon shares, stock options and warrants, and the price per common share,stock option and warrant, reflect this reverse stock split.

 

**4.**              **Restaurant closing and assetimpairment charges**

 

Rogers,Arkansas

 

InAugust 2008, the Company ceased operations at its Rogers, Arkansasrestaurant.  Since opening in October 2007,the restaurant failed to generate positive cash flow and had approximately $1.4million of net loss.  Management believesthe closure of this restaurant has allowed the Company to focus its capital andpersonnel resources on its other restaurants in order to increase futureoperating efficiencies and cash flow. The Company has attempted to find a replacement tenant or negotiate fora lease termination for this location which expires December 31,2018.  Costs incurred in connection withthis closure include one-time benefits to employees who were involuntarilyterminated of $57,681, costs incurred for early contract termination of $4,578and costs to close and maintain the facility of $843,097.  During the third quarter of 2008, the Companyrecorded a non-cash impairment charge of $135,057 related to the write-off ofthe carrying value of the restaurant equipment at the Rogers location.  The amount of this write-off is equal to thedifference between the net book value of the equipment and the expected futurecash flows generated by leasing the equipment to a replacement tenant.  Until the Company is able to find areplacement tenant, it will incur ongoing costs such as utilities, landscapeand maintenance and general liability insurance. In accordance with the FASBguidance on accounting for costs associated with exit or disposal activities,the Company recorded a non-cash lease termination liability of $1,762,689 basedon management’s estimate of the fair value of these obligations.  This required management to estimate thepresent value of the future minimum lease obligations offset by the estimatedsublease rentals that could be reasonably obtained for the property.  Pursuant to the terms of the lease, theannual lease payments for the Roger’s site were $405,000 as of March 30,2010, and the ongoing costs to maintain the property were approximately $5,000per month.  As of March 30, 2010,the Company’s future undiscounted cash payments under the terms of this leasewere approximately $3.9 million.

 

7

----

Tableof Contents

 

Troy, Michigan

 

In May 2008, the Company entered into a 20-year net leaseagreement relating to the restaurant it had planned to open in Troy,Michigan.  However, in February 2009,the Company decided not to build on that site, and as part of an agreement withthe Dunham Entities, the Company will reimburse DCM for any out-of-pocketexpenses incurred, including the carrying cost of the related land, less netproceeds from the sale of the real estate or lease income associated with thesite.  As of March 30, 2010, thecarrying cost of the land approximated $16,000 per month.  Such expenses will be amortized and payableto DCM over a 60-month period commencing January 2011, at a 6% annualinterest rate.  The Company’s managementhas concluded that as of March 30, 2010, it is probable that the Companywill need to reimburse DCM approximately $486,000 and has included such amountas “accrued exit or disposal activities” on its balance sheet, pursuant to theFASB guidance on accounting for contingencies.

 

The costs related to the closing of the Rogers restaurant and thedecision not to build the Troy restaurant aggregated $131,601 in the firstquarter of 2010 and are reflected on the Company’s condensed consolidatedstatements of operations as “exit or disposal activities”.**  **The following is a reconciliationof the beginning and ending balances of exit or disposal activities:

 

| Accrued  exit or disposal costs at December 29, 2009 |   | $        | 2,138,663 |   |
|-----------------------------------------------------------|--------|----------|-----------|--------|
|                                                      |   |     |      |
| Costs  incurred and charged to expense                    |   | 164,341  |      |
| Payments                                                  |   | (116,341 | )         |
| Amortization  of sublease liability                       |   | (32,740  | )         |
| Accrued  exit or disposal costs at March 30, 2010    |   | $        | 2,153,923 |   |

 

**5.**              **Non-current assets**

 

Property and equipment

 

Property and equipment is recorded at cost and depreciated over theestimated useful lives of the assets. Leasehold improvements are depreciated over the term of the relatedlease or the estimated useful life, whichever is shorter.  Depreciation and amortization of assets heldunder capital leases and leasehold improvements are computed on thestraight-line method for financial reporting purposes.  The following is a summary of the Company’sproperty and equipment at March 30, 2010 and December 29, 2009:

 
| ** **                     | ** ** | **March 30, 2010** | ** ** | **December 29, 2009** | ** ** |
|--------------------------------|------------|-------------------------|------------|----------------------------|------------|
|                           |       |                    |       |                       |       |
| Land                           |       | $                       | 18,000     |                       | $          | 18,000 |   |
| Buildings                      |       | 31,311,399              |       | 31,311,399                 |       |
| Leasehold  improvements        |       | 9,461,155               |       | 9,444,418                  |       |
| Equipment  and furniture       |       | 33,536,939              |       | 33,536,306                 |       |
| Construction  in progress *    |       | 182,103                 |       | 108,868                    |       |
|                           |       | 74,509,596              |       | 74,418,991                 |       |
| Less  accumulated depreciation |       | (24,497,623             | )          | (23,082,577                | )          |
|                           |       | $                       | 50,011,973 |                       | $          | 51,336,414 |   |

----

*Construction inprogress includes the following approximate amounts for items yet to be placedin service:

 
| ** **                                             | ** ** | **March 30, 2010** | ** ** | **December 29, 2009** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| Prototype/Leasehold  improvements for future locations |       | $                       | 91,500     |                       | $          | 96,400 |   |
| Equipment  at current locations                        |       | $                       | 90,500     |                       | $          | 12,400 |   |

 

8

----

Tableof Contents

 

Intangible and other assets

 

Intangible and other assets consisted of the following:

 
| ** **                     | ** ** | **March 30, 2010** | ** ** | **December 29, 2009** | ** ** |
|--------------------------------|------------|-------------------------|------------|----------------------------|------------|
| Intangible  assets:            |       |                    |       |                       |       |
| Liquor  licenses               |       | $                       | 760,865    |                       | $          | 760,865 |   |
| Trademarks                     |       | 166,342                 |       | 160,193                    |       |
|                           |       |                    |       |                       |       |
| Other:                         |       |                    |       |                       |       |
| Deferred  loan costs           |       | 390,962                 |       | 386,083                    |       |
| Security  deposits             |       | 225,346                 |       | 233,146                    |       |
|                           |       | 1,543,515               |       | 1,540,287                  |       |
| Less  accumulated amortization |       | (339,125                | )          | (297,526                   | )          |
|                           |       | $                       | 1,204,390  |                       | $          | 1,242,761 |   |

 

**6.**        **Accruedexpenses**

 

Accrued expenses consisted of the following:

 
| ** **                             | ** ** | **March 30, 2010** | ** ** | **December 29, 2009** | ** ** |
|----------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| Payroll  and related                   |       | $                       | 1,310,284  |                       | $          | 1,863,688 |   |
| Deferred  revenue from gift card sales |       | 1,731,990               |       | 2,304,312                  |       |
| Sales  taxes payable                   |       | 677,849                 |       | 606,051                    |       |
| Interest                               |       | 285,345                 |       | 269,076                    |       |
| Real  estate taxes                     |       | 628,742                 |       | 580,879                    |       |
| Deferred  registration costs           |       | 158,289                 |       | 172,179                    |       |
| Other                                  |       | 516,436                 |       | 503,868                    |       |
|                                   |       | $                       | 5,308,935  |                       | $          | 6,300,053 |   |

 

**7.**        **Deferredrent payable**

 

Under the terms ofthe lease agreement the Company entered into regarding its Lincoln, Nebraskaproperty, the Company received a lease incentive of $450,000, net.  This lease incentive was recorded as a deferredrent payable and is being amortized to reduce rent expense over the initialterm of the lease using the straight-line method.

 

Also included in deferred rent payable isthe difference between minimum rent payments and straight-line rent over the initiallease term including the “build out” or “rent-holiday” period.  Additionally, certain of the Company’slandlords have agreed to defer a portion of the payments due them for specifiedperiods of time.  The Company alsocontinues to negotiate with its landlords to reduce rents and has withheld rentto certain of its landlords during rent negotiations.  These deferrals are offset in part by thefair value of the warrants issued to certain landlords in consideration of rentreductions.  Contingent rent expense,which is based on a percentage of revenue, is also recorded to the extent itexceeds minimum base rent per the lease agreement.  Deferred rent payable consisted of:

 

9

----

Tableof Contents

 
| ** **                                              | ** ** | **March 30, 2010** | ** ** | **December 29, 2009** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| Difference  between minimum rent and straight-line rent |       | $                       | 3,543,772  |                       | $          | 3,251,235 |   |
| Deferred  rent payments, net of $146,280 warrant value* |       | 1,327,413               |       | 1,140,843                  |       |
| Contingent  rent expected to exceed minimum rent        |       | 51,327                  |       | 63,617                     |       |
| Tenant  improvement allowance                           |       | 291,389                 |       | 298,889                    |       |
|                                                    |       | $                       | 5,213,901  |                       | $          | 4,754,584 |   |

 

----

*Of this amount,approximately $727,735 will be due to DCM, our primary landlord, in August 2010and approximately $636,232 is due to General Growth Properties with which weare negotiating reduced lease costs for three of our locations.

 

**8.**  **Long-termdebt**

 

As of March 30, 2010, the Company had three long-term loansoutstanding with First National Bank (“FNB”), an independent financialinstitution in Pierre, South Dakota, the proceeds of which it used to purchaseassets at its Fargo, North Dakota; Des Moines and Davenport, Iowarestaurants.  These loans are secured bythe tangible personal property and fixtures at the respective locations and areguaranteed by Steven J. Wagenheim, the Company’s president, chief executiveofficer and one of its directors.

 

In August 2008, the Company issued a promissory note to an Indianageneral partnership in the amount of $250,000. The note was issued to secure the liquor license for the Company’srestaurant located in South Bend, Indiana.

 

In March 2009, the Company entered into a bridge loan agreementwith Harmony Equity Income Fund, L.L.C. and Harmony Equity Income Fund II,L.L.C. (collectively, “Harmony”), a group of accredited investors.  One of the Company’s directors, Eugene E.McGowan, is a member of, and has a beneficial interest in Harmony.  The bridge loan was funded to the extent of$800,000 on March 30, 2009 and is evidenced by notes bearing interest at9.0% per annum.  In addition, the Companyissued to Harmony warrants for the purchase of an aggregate of 53,332 shares ofcommon stock at a price of $1.52 per share. The notes are secured by a mortgage against the lease, and securityagreements against personal property and intangibles relating to the Company’sSioux Falls, South Dakota restaurant, including a grant of the rights to usepatents, trademarks and other intangibles associated with that restaurant.  Up to 20% of each bridge note may beconverted into common stock at a conversion price equal to $3.00 per share.

 

As of March 30, 2010 and December 29, 2009, the balances,interest rates and maturity dates of our long-term debt were as follows:

 
| ** **                   | ** ** | **March 30, 2010** | ** ** | **December 29, 2009** | ** ** |
|------------------------------|------------|-------------------------|------------|----------------------------|------------|
| Des  Moines (FNB)            |       |                    |       |                       |       |
| Balance                      |       | $                       | 59,691     |                       | $          | 94,865 |   |
| Annual  interest rate        |       | 5.50                    | %          | 5.50                       | %          |
| Maturity  date               |       | 8/27/2010               |       | 8/27/2010                  |       |
|                         |       |                    |       |                       |       |
| Davenport  (FNB)             |       |                    |       |                       |       |
| Balance                      |       | $                       | 115,600    |                       | $          | 148,828 |   |
| Annual  interest rate        |       | 5.50                    | %          | 10.25                      | %          |
| Maturity  date               |       | 1/6/2011                |       | 1/6/2011                   |       |
|                         |       |                    |       |                       |       |
| Fargo  (FNB)                 |       |                    |       |                       |       |
| Balance                      |       | $                       | 1,173,102  |                       | $          | 1,187,349 |   |
| Annual  interest rate        |       | 8.75                    | %          | 8.75                       | %          |
| Maturity  date               |       | 8/15/2011               |       | 8/15/2011                  |       |
|                         |       |                    |       |                       |       |
| South  Bend (Liquor license) |       |                    |       |                       |       |
| Balance                      |       | $                       | 244,764    |                       | $          | 245,640 |   |
| Annual  interest rate        |       | 8.00                    | %          | 8.00                       | %          |
| Maturity  date               |       | 9/30/2023               |       | 9/30/2023                  |       |
|                         |       |                    |       |                       |       |
| Harmony  (Bridge loan)       |       |                    |       |                       |       |
| Balance                      |       | $                       | 802,478    |                       | $          | 856,479 |   |
| Annual  interest rate        |       | 9.00                    | %          | 9.00                       | %          |
| Maturity  date               |       | 12/1/2011               |       | 12/1/2011                  |       |

 

10

----

Tableof Contents

 

Future maturities of long-term debt, exclusive of interest, are asfollows:

 
| **Year  ending:** |   |      |            |
|-------------------|--------|-----------|-----------------|
| 2010              |   | $         |  265,327   |   |
| 2011              |   | 1,892,242 |            |
| 2012              |   | 4,263     |            |
| 2013              |   | 4,617     |            |
| 2014              |   | 5,000     |            |
| Thereafter        |   | 224,186   |            |
|              |   | $         |  2,395,635 |   |

 

**9.**        **Capitalleases**

 

Asof March 30, 2010, the Company operated 15 restaurants under capital leaseagreements, of which one expires in 2019, one in 2020, one in 2021, two in2022, two in 2023, three in 2024, two in 2026 and three in 2027, all withrenewable options for additional periods. Thirteen of these lease agreements originated with Donald A. Dunham, Jr.and entities affiliated with him (collectively, the “Dunham Landlords”).  Under certain of the leases, the Company maybe required to pay additional contingent rent based upon restaurant sales.  At the inception and the amendment date ofeach of these leases, the Company evaluated the fair value of the land and buildingseparately pursuant to the FASB guidance on accounting for leases.  The land portion of these leases isclassified as an operating lease while the building portion of these leases isclassified as a capital lease because its present value was greater than 90% ofthe estimated fair value at the beginning or amendment date of the lease and/orthe lease term represents 75% or more of the expected life of the property.

 

TheCompany also has a land and building lease agreement for its beer productionfacility.  This ten-year lease allows theCompany to purchase the facility at any time for $1.00 plus the unamortizedconstruction costs.  Because theconstruction costs will be fully amortized through payment of rent during thebase term, if the option is exercised at or after the end of the initialten-year period, the option price will be $1.00.  As such, the lease, including land, isclassified as a capital lease.

 

InMay 2008, the Company entered into a 20-year net lease agreement relatingto the restaurant it had planned to open in Troy, Michigan.  However, in February 2009, the Companydecided not to build on that site, and as part of an agreement with the DunhamEntities, the Company will reimburse DCM for any out-of-pocket expensesincurred less net proceeds from the sale of the real estate or lease incomeassociated with the site (Note 4).

 

11

----

Table of Contents

 

Asof March 30, 2010, the Company leased equipment at three of itsrestaurants pursuant to a lease agreement with Carlton Financial Corporation (“Carlton”).The value of the equipment financed at each of the three locations ranges fromapproximately $0.8 million to $1.1 million, the annual interest rateon each ranges from 12.9% to 19.6% and the leases will expire in October 2012.  The Company may purchase Carlton’s interestin all, but not less than all, of the equipment for a purchase price equal to15% of the original cost of the equipment. Steven J. Wagenheim, the Company’s president, chief executive officerand one of its directors, was required to personally guarantee payments to bemade to Carlton under the lease financing and the Company’s board of directorsagreed to compensate him for such guarantee.

 

In June 2007, the Company entered into a lease for an energyoptimization system at its Maple Grove, Minnesota restaurant for approximately$30,000.  This five-year lease commenced June 28,2007, carries an annual interest rate of approximately 11.9% and contains abargain purchase option.

 

Included in property and equipment are the following assets held undercapital leases:

 
| ** **                            | ** ** | **March 30, 2010** | ** ** | **December 29, 2009** | ** ** |
|---------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| Land                                  |       | $                       | 18,000     |                       | $          | 18,000 |   |
| Building                              |       | 31,311,399              |       | 31,311,399                 |       |
| Equipment  and leasehold improvements |       | 3,365,587               |       | 3,365,587                  |       |
|                                  |       | 34,694,986              |       | 34,694,986                 |       |
| Less  accumulated depreciation        |       | (7,913,430              | )          | (7,374,244                 | )          |
|                                  |       | $                       | 26,781,556 |                       | $          | 27,320,742 |   |

 

Minimum futurelease payments under all capital leases are as follows:

 
| **Year  ending:**                            | ** ** | **Capital Leases** | ** ** |
|----------------------------------------------|------------|--------------------|------------|
| 2010                                         |       | $                  | 3,014,612  |   |
| 2011                                         |       | 4,239,212          |       |
| 2012                                         |       | 3,862,399          |       |
| 2013                                         |       | 3,777,451          |       |
| 2014                                         |       | 3,833,182          |       |
| Thereafter                                   |       | 37,770,250         |       |
| Total  minimum lease payments                |       | 56,497,106         |       |
|                                         |       |               |       |
| Less  amount representing interest           |       | (28,403,883        | )          |
| Present  value of net minimum lease payments |       | 28,093,223         |       |
|                                         |       |               |       |
| Less  current portion                        |       | (850,475           | )          |
| Long-term  portion of obligations            |       | $                  | 27,242,748 |   |

 

Amortizationexpense related to the assets held under capital leases is included withdepreciation expense on the Company’s statements of operations.

 

**10.      Commitments andcontingencies**

 

Litigation

 

From time to time, lawsuits are threatened or filed against the Companyin the ordinary course of business.  Suchlawsuits typically involve claims from customers, former or current employees,and others related to issues common to the restaurant industry.  A number of such claims may exist at anygiven time.  Although there can be noassurance as to the ultimate disposition of these matters, it is management’sopinion, based upon the information available as of May 7, 2010,****that the expected outcome of these matters, individually or

 

12

----

Table ofContents

 

in the aggregate, will not have a material adverse effect on theresults of operation, liquidity or financial condition of the Company.  In addition, some property owners havebrought actions against the Company or its landlords arising out of theCompany’s withholding of rent during the period in which it is attempting tonegotiate the lease terms.  Managementbelieves their actions have been stayed and will continue in abeyance whileactive negotiations are taking place with property owners.

 

Rent reductions

 

Along with DCM, the Company continues to seek to lower the cost of itsland leases at several locations.  Insome instances, the Company and DCM have not paid rent during this negotiatingperiod.  The Company accrues for anynon-paid rent during this period under “deferred rents” on the balance sheet(see Note 7 regarding amounts due landlords). To the extent the parties are unable to reach agreements to reduce leasecosts, legal action could be brought by lessors that may result in materialadverse consequences to the Company, DCM or both.  Such material adverse consequences couldinclude legal actions by land owners or other landlords to terminate leases andrecover delinquent and future rents. Additionally, if any of the Company’s landlords or parties from whom theCompany’s landlords lease property fail financially, the ramifications upon theCompany and the Company’s continued occupancy of the leased restaurants wouldbe uncertain.  The Company could lose thefuture revenue from any such affected locations and lose the value of itsinvestment in improvements thereon, if it is unable to negotiate arrangementswith new owners of the leased locations, or creditors or bankruptcy trustees ofsuch landlords.

 

Employment agreements

 

The Company has entered intoemployment agreements with Steven J. Wagenheim, its president and chiefexecutive officer; James G. Gilbertson, its chief financial officer; and DariusH. Gilanfar, its chief operating officer, providing for their employment on anat-will basis. Each agreement, as amended in October 2009, provides thatthe executive will have employment for a term of one year from the amendmentdate, and will be entitled to severance benefits that include one year of basecompensation if his employment is terminated without cause or for good reason,as defined therein, in addition to the balance of the one-year term, ifterminated prior to the end of such term. Each employment agreement is automatically extended for a one-year termunless either the Company or the executive gives at least 60 days’ notice tothe other of an intent not to extend. The agreements also provide for a baseannual salary which may be increased by the Company’s board of directors,incentive compensation as determined by the Company’s compensation committeefrom time to time, and participation in the Company’s other employee benefitplans. In addition, each agreement includes change in control provisions thatentitle the executive to receive severance pay equal to 12 months of salary ifthere is a change in control of the Company and his employment terminateswithout cause or for good reason, as defined in the agreement.  Each executive has also agreed to certainnondisclosure provisions during the term of his employment and any timethereafter, and certain non-competition, non-recruitment and/ornon-interference provisions during the term of his employment and for a certainperiod thereafter. As of May 7, 2010, the current annual base salaries ineffect for such executives under the foregoing employment agreements were asfollows: Mr. Wagenheim ($300,000), Mr. Gilbertson ($225,000), and Mr. Gilanfar($202,860).

 

Developmentagreement

 

In April 2008, the Company entered into a development agreement withUnited Properties Investment LLC (“United Properties”) for the development ofup to 22 restaurants to be built between 2009 and 2012.  UnitedProperties will be responsible for all costs related to the land and buildingof each restaurant.  The developmentagreement provides for a cooperative process between United Properties and theCompany’s management for the selection of restaurant sites and the developmentof restaurants on those sites and scheduling for the development andconstruction of each restaurant once a location is approved.  Theannual lease rate for fee-simple land and building developments will be 9.5%and the Company will have the right of first offer to purchase these restaurants.  Additionally, in the event United Propertiessells one of the buildings that it develops for the Company at an amount inexcess of the threshold agreed to by the parties in the agreement, then theCompany will share in the profits of that sale. The Company assumes no liability in the event United Properties sells abuilding at a loss.  The Companyis not bound to authorize the construction of restaurants during that timeperiod, but generally cannot use another developer to develop or own a restaurantas long as the development agreement is in effect.  The Company can, however, use anotherdeveloper if United Properties declines to build a particular restaurant.  The Company currently has no sites underdevelopment.

 

13

----

Table of Contents

 

PurchaseCommitments

 

The Company has entered into contracts through 2014 with certainsuppliers of raw materials (primarily hops) for minimum purchases both in termsof quantity and in pricing.   As of March 30,2010, the Company’s future obligations under such contracts aggregatedapproximately $1.2 million.

 

**11.****      ****Stockplans**

 

In July 1997,the Company adopted the 1997 Stock Option Plan for employees and non-employees,including consultants to the Company, to purchase the Company’s common stock atan exercise price that equals or exceeds the fair market value on the date ofgrant.   As of March 30, 2010,options to purchase 2,082 shares of common stock were outstanding under theplan, which expired July 28, 2007. All options outstanding under this plan are fully vested and areexercisable for ten years from the date of grant.

 

As of March 30,2010, options to purchase 27,500 shares of common stock were outstanding underthe 1997 Director Stock Option Plan, which expired July 29, 2007.  All such options are fully vested andexercisable for five years from the date of grant.  On May 2, 2007, theCompany’s board of directors agreed that until the adoption of any futureequity plan for non-employee directors, awards of stock options for thepurchase of 2,500 shares of common stock per year, exercisable for a period often years, should be made to each non-employee director on the anniversary ofhis election to the board under the 2002 Equity Incentive Plan.

 

In August 2002,the Company adopted the 2002 Equity Incentive Plan, now known as the Amendedand Restated Equity Incentive Plan, for employees, prospective employees,officers and members of the Company’s board of directors, as well as consultants and advisors tothe Company, to purchase shares of the Company’s common stock at an exerciseprice that equals or exceeds the fair market value on the date of grant.  The number of shares authorized for issuanceas of March 30, 2010 was 468,290, of which 111,787 shares remainedavailable for future issuance and options to purchase 346,330 shares wereoutstanding.  Although vesting schedulesvary, option grants under this plan generally vest over a three or four-yearperiod and options are exercisable for no more than ten years from the date of grant.

 

A summary of the status of the Company’s stock options as of March 30, 2010 is presentedbelow:

 
| **Fixed  Options**                                          | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|---------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding  at December 30, 2008                      |       | 364,689    |       | $                                     | 21.60      |                                                | 6.2 years  |                            |       |   |
|                                                        |       |       |       |                                  |       |                                                |       |                            |       |
| Granted                                                     |       | 126,888    |       | 1.35                                  |       | 9.2 years                                           |       |                            |       |
| Exercised                                                   |       | —     |       | —                                |       |                                                |       |                            |       |
| Forfeited                                                   |       | (98,391    | )          | 17.49                                 |       |                                                |       |                            |       |
| Outstanding  at December 29, 2009                      |       | 393,186    |       | $                                     | 16.10      |                                                | 6.6 years  |                            | $          | 78,467 |   |
|                                                        |       |       |       |                                  |       |                                                |       |                            |       |
| Granted                                                     |       | 5,832      |       | 1.83                                  |       | 9.8 years                                           |       |                            |       |
| Exercised                                                   |       | —     |       | —                                |       |                                                |       |                            |       |
| Forfeited                                                   |       | (15,607    | )          | 9.48                                  |       |                                                |       |                            |       |
| Outstanding  at March 30, 2010                         |       | 383,411    |       | $                                     | 16.15      |                                                | 6.4 years  |                            | $          | 54,437 |   |
|                                                        |       |       |       |                                  |       |                                                |       |                            |       |
| Options  exercisable at December 29, 2009              |       | 198,659    |       | $                                     | 23.01      |                                                | 5.2 years  |                            |       |   |
| Options  exercisable at March 30, 2010                 |       | 218,712    |       | $                                     | 23.41      |                                                | 4.7 years  |                            | $          | 97 |   |
|                                                        |       |       |       |                                  |       |                                                |       |                            |       |
| Weighted-average  fair value of options granted during 2010 |       | $          | 1.63       |                                  |       |                                                |       |                            |       |   |
|                                                             |            |            |            |                                       |            |                                                     |            |                                 |            |  |  |  |

 

14

----

Table ofContents

 

The aggregate intrinsic value in the table above represents the totalpretax intrinsic value (the difference between the closing price of the Company’sstock on March 30,2010 and the exercise price, multiplied by the number of in-the-moneyoptions) that would have been received by the option holders had all optionholders exercised their options on March 30, 2010.    As of March 30, 2010, there was approximately$240,871 of total unrecognized compensation cost related to unvestedshare-based compensation arrangements, of which $136,737 is expected to berecognized during the remainder of fiscal year 2010, $78,296 in fiscal year2011, $23,246 in fiscal year 2012, $2,576 in fiscal year 2013 and $16 in fiscalyear 2014.

 

The following table summarizes information about stock optionsoutstanding at March 30,2010:

 
| ** **                      | ** ** | **Options Outstanding**             | ** ** | **Options Exercisable**                             | ** ** |
|---------------------------------|------------|-------------------------------------|------------|-----------------------------------------------------|------------|
| **Range  of   Exercise Prices** | ** ** | **Number of  Options  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Options  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                            |       |                                |       |                                                |       |   |   |   |   |   |   |
| $1.00 - $6.00                   |       | 120,141                             |       | 9.1 years                                           |       | $ | 1.67 |   | 6,328 |   | $ | 2.51 |   |
| $6.01 - $12.00                  |       | 25,413                              |       | 7.1 years                                           |       | $ | 10.30 |   | 13,163 |   | $ | 9.97 |   |
| $12.01 - $18.00                 |       | 48,903                              |       | 5.9 years                                           |       | $ | 14.04 |   | 24,875 |   | $ | 14.80 |   |
| $18.01 - $24.00                 |       | 59,496                              |       | 5.2 years                                           |       | $ | 21.93 |   | 59,496 |   | $ | 21.93 |   |
| $24.01 - $30.00                 |       | 80,464                              |       | 5.1 years                                           |       | $ | 26.12 |   | 72,130 |   | $ | 26.21 |   |
| $30.01 - $36.00                 |       | 32,328                              |       | 2.2 years                                           |       | $ | 31.50 |   | 31,609 |   | $ | 31.49 |   |
| $36.01 - $42.00                 |       | 16,666                              |       | 7.0 years                                           |       | $ | 37.20 |   | 11,111 |   | $ | 37.20 |   |
| Total                           |       | 383,411                             |       | 6.4 years                                           |       | $ | 16.15 |   | 218,712 |   | $ | 23.41 |   |

 

**12.  Common stock warrants**

 

InOctober 2005, the Company entered into a securities purchase agreementwith certain accredited investors for the sale of approximately $5.34 millionof common stock and warrants.  Under thisagreement, the Company issued five-year warrants for the purchase of 36,960shares of common stock at an exercise price of $39.00 per share to suchinvestors and five-year warrants for the purchase of 9,239 shares of commonstock at an exercise price of $39.00 per share to the Company’s placementagent. Such warrant agreements with the investors and placement agent for thistransaction contain certain anti-dilution provisions.  Pursuant to these provisions, the number ofshares purchasable upon exercise of these warrants and the related purchaseprice both required adjustment upon the issuance of warrants in the firstquarter of 2009, at an exercise price less than the thresholds set forth in thesecurity purchase agreement.  Theexercise price of each existing warrant was multiplied by a fraction, thenumerator of which was the sum of the number of shares of common stockoutstanding immediately prior to such issuance, plus the number of shares ofcommon stock which the offering price for such shares of common stock wouldpurchase at the closing price of our common stock on the closing date of thissecurities purchase agreement; and the denominator of which was the sum of thenumber of shares of common stock outstanding immediately prior to such issuanceplus the number of such new securities so issued.  As a result of the issuance of common stockin October 2009 at a price per share less than the thresholds set forth inthe security purchase agreement, further anti-dilution adjustments wererequired.  As a result of theseadjustments, the number of shares purchasable under these warrants at March 30,2010 was 110,956 and the exercise price was $16.24 per share.  As of March 30, 2010, none of suchwarrants had been exercised.

 

15

----

Table of Contents

 

Duringthe first nine months of 2009, in consideration of rent reduction agreementsentered into with certain of its landlords, the Company issued five-yearwarrants to purchase the Company’s common stock to such landlords.  The aggregate number of shares underlyingsuch warrants was 201,028 shares and the weighted average exercise price was$1.60 per share.  Pursuant to theprovisions of such agreements, the number of shares purchasable upon exerciseof these warrants and the related purchase price both required adjustment uponthe issuance of warrants in the first quarter of 2009, at an exercise priceless than the thresholds set forth in the agreement.  The exercise price of each warrant issuedprior to such issuance was multiplied by a fraction, the numerator of which wasthe sum of the number of shares of common stock outstanding immediately priorto such issuance of warrants, plus the number of shares of common stock whichthe offering price for such shares of common stock would purchase at thewarrant exercise price in effect immediately prior to such issuance; and thedenominator of which was the sum of the number of shares of common stockoutstanding immediately prior to such issuance plus the number of such newsecurities so issued.  As a result ofthese adjustments, the number of shares purchasable under these warrants at March 30,2010 was 201,125 and the weighted average exercise price was $1.60 pershare.  As of March 30, 2010, noneof such warrants had been exercised.

 

Pursuantto the Harmony bridge loan agreement entered into in March 2009, theCompany issued to the investors warrants for the purchase of an aggregate of53,332 shares of common stock at a price of $1.52 per share.  Such warrants became exercisable September 30,2009, and remained unexercised at March 30, 2010.

 

As of March 30, 2010, warrants for the purchase of an aggregate of365,413 shares of common stock were outstanding and exercisable.  The weighted average exercise price of suchwarrants was $16.24 per share.

 

**13.       Retirement plan**

 

The Companysponsors a defined contribution plan under the provisions of section 401(k) ofthe Internal Revenue Code.  The plan isvoluntary and is provided to all employees who meet the eligibilityrequirements.  A participant can elect tocontribute up to 100% of his/her compensation subject to IRS limits.  Prior to fiscal year 2009, the Company madeno contribution to the plan.  Beginningin fiscal year 2009, the Company elected to match 10% of such contributions upto 6% of the participant’s compensation. In fiscal year 2009, the Company contributed $12,761 under the plan, andin the first quarter of 2010, the Company contributed an additional $3,525under the plan.  The Company expects tocontribute approximately $9,200 under the plan during the remainder of fiscalyear 2010.

 

**ITEM 2 Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*This discussion and analysis contains variousnon-historical forward-looking statements within the meaning of Section 21Eof the Exchange Act.  Although we believethat, in making any such statement, our expectations are based on reasonableassumptions, any such statement may be influenced by factors that could causeactual outcomes and results to be materially different from those projected.  When used in the following discussion, thewords “anticipates,” “believes,” “expects,” “intends,” “plans,” “estimates” andsimilar expressions, as they relate to us or our management, are intended toidentify such forward-looking statements. You are cautioned not to attribute undue certainty to suchforward-looking statements, which are qualified in their entirety by thecautions and risks described herein. Please refer to the “Risk Factors” section of our Annual Report on Form 10-K,filed with the Securities and Exchange Commission on March 22, 2010 andthe “Risk Factors” section of this document for additional factors known to usthat may cause actual results to vary.*

 

**Overview**

 

We are a Modern Americanupscale casual restaurant chain.   As of March 30,2010, we operated 26 restaurants in 11 Midwestern states featuring on-premisesbreweries, substantially all of which operate under the name of Granite CityFood & Brewery®.  We believe ourmenu features high quality yet affordable family favorite menu items preparedfrom made-from-scratch recipes and served in generous portions.  We believe that the sophisticated yetunpretentious restaurants, proprietary food and beverage products, attractiveprice points and 

 

16

----

Table of Contents

 

highservice standards combine for a great dining experience.  The location of each restaurant in operationand the month and year of its opening appear in the following chart:

 
| **Unit** | ** ** | **Location**               | ** ** | **Opened** |
|----------|------------|----------------------------|------------|------------|
| 1        |       | St. Cloud,  Minnesota      |       | Jun-99     |
| 2        |       | Sioux Falls,  South Dakota |       | Dec-00     |
| 3        |       | Fargo, North  Dakota       |       | Nov-01     |
| 4        |       | Des Moines, Iowa           |       | Sep-03     |
| 5        |       | Cedar Rapids,  Iowa        |       | Nov-03     |
| 6        |       | Davenport, Iowa            |       | Jan-04     |
| 7        |       | Lincoln,  Nebraska         |       | May-04     |
| 8        |       | Maple Grove,  Minnesota    |       | Jun-04     |
| 9        |       | East Wichita,  Kansas      |       | Jul-05     |
| 10       |       | Eagan, Minnesota           |       | Sep-05     |
| 11       |       | Kansas City,  Missouri     |       | Nov-05     |
| 12       |       | Kansas City,  Kansas       |       | Jan-06     |
| 13       |       | Olathe, Kansas             |       | Mar-06     |
| 14       |       | West Wichita,  Kansas      |       | Jul-06     |
| 15       |       | St. Louis Park,  Minnesota |       | Sep-06     |
| 16       |       | Omaha, Nebraska            |       | Oct-06     |
| 17       |       | Roseville,  Minnesota      |       | Nov-06     |
| 18       |       | Madison,  Wisconsin        |       | Dec-06     |
| 19       |       | Rockford,  Illinois        |       | Jul-07     |
| 20       |       | East Peoria,  Illinois     |       | Oct-07     |
| 21       |       | Orland Park,  Illinois     |       | Dec-07     |
| 22       |       | St. Louis,  Missouri       |       | Jan-08     |
| 23       |       | Ft. Wayne,  Indiana        |       | Jan-08     |
| 24       |       | Toledo, Ohio               |       | Feb-08     |
| 25       |       | South Bend,  Indiana       |       | Jul-08     |
| 26       |       | Indianapolis,  Indiana     |       | Feb-09     |

 

In August 2008, weceased operations at our restaurant in Rogers, Arkansas (see Note 4 to ourcondensed consolidated financial statements). However, we are currently bound by the terms of this lease agreementthrough December 2018.

 

We operate acentrally-located beer production facility in Ellsworth, Iowa which facilitatesthe initial stage of our patented brewing process.  We believe that this brewing process improvesthe economics of microbrewing as it eliminates the initial stages of brewingand storage at multiple locations, thereby reducing equipment and developmentcosts at new restaurant locations. Additionally, having a common starting point, the beer productioncreates consistency of taste for our product from restaurant torestaurant.  The initial product producedat our beer production facility is transported by truck to the fermentationvessels at each of our restaurants where the brewing process is completed. In2007, we were granted a patent by the United States Patent Office for thisbrewing process.  We believe that ourcurrent beer production facility, which opened in June 2005, has thecapacity to service up to 35 restaurant locations.

 

DHW Leasing, L.L.C. (“DHW”)became the beneficial owner of approximately 63.4% of our common stock in October 2009.  The members of DHW are Donald A. Dunham, Jr.and Charles J. Hey.  Mr. Dunham, whois also the sole member of Dunham Capital Management, LLC (“DCM”) and 70% ownerof Dunham Equity Management, LLC (“DEM”), became one of our directors in October 2009.  DHW, DCM and DEM are collectively, with Mr. Dunham,referred to herein as the “Dunham Entities.” As of March 30, 2010, Mr. Dunham beneficially owned approximately64.3% of our common stock, including the shares held by DHW.  DCM and DEM are entities that either are thelandlord or the general partner in various limited partnerships that own real 

 

17

----

Tableof Contents

 

estateleased to our company.  Mr. Dunham,as an individual, also owns a limited partnership interest in one of thelimited partnerships that own real estate leased to our company.

 

Our industry can besignificantly affected by changes in economic conditions, discretionaryspending patterns, consumer tastes, and cost fluctuations.  Over the past two years, consumers have beenunder increased economic pressures and as a result, many have changed theirdiscretionary spending patterns.  Manyconsumers are dining out less frequently than in the past and/or have decreasedthe amount they spend on meals while dining out.  To offset the negative impact of decreasedsales, we undertook a series of initiatives to renegotiate the pricing ofvarious aspects of our business, effectively reducing our cost of food,insurance, payroll processing, shipping, supplies and most recently, ourproperty and equipment rent.  We haveimplemented marketing initiatives designed to increase brand awareness and helpdrive guest traffic.  We believe theseinitiatives contributed to the increase in sales and guest traffic in the firstquarter of 2010.

 

Webelieve that our operating results will fluctuate significantly because ofseveral factors, including the operating results of our restaurants, changes infood and labor costs, increases or decreases in comparable restaurant sales,general economic conditions, consumer confidence in the economy, changes inconsumer preferences, nutritional concerns and discretionary spending patterns,competitive factors, the skill and the experience of our restaurant-levelmanagement teams, the maturity of each restaurant, adverse weather conditionsin our markets, our ability to recommence our expansion plans, and the timingof any future restaurant openings and related expenses.

 

Weutilize a 52/53-week fiscal year ending the last Tuesday in December forfinancial reporting purposes.  Thethirteen weeks ended March 30, 2010 and March 31, 2009 included 338and 332 operating weeks, respectively, which is the sum of the actual number ofweeks each restaurant operated.   Theadditional six operating weeks in 2010 relate to our Indianapolis, Indiana restaurantwhich opened in February 2009. Because we have opened new restaurants at various times throughout theyears, we provide this statistical measure to enhance the comparison ofrevenues from period to period as changes occur in the number of units we areoperating.

 

Our restaurant revenue is comprised almostentirely of the sales of food and beverages. The sale of retail items typically represents less than one percent oftotal revenue.  Product costs include thecosts of food, beverages and retail items. Labor costs include direct hourly and management wages, taxes andbenefits for restaurant employees. Direct and occupancy costs include restaurant supplies, marketing costs,rent, utilities, real estate taxes, repairs and maintenance and other relatedcosts.  Pre-opening costs consist ofdirect costs related to hiring and training the initial restaurant workforce,the salaries and related costs of our dedicated new store opening team, rentexpense incurred during the construction period and other direct costs associatedwith opening new restaurants.  Generaland administrative expenses are comprised of expenses associated with allcorporate and administrative functions that support existing operations, whichinclude management and staff salaries, employee benefits, travel, informationsystems, training, market research, professional fees, supplies and corporaterent.  Depreciation and amortizationincludes depreciation on capital expenditures at the restaurant and corporatelevels and amortization of intangibles that do not have indefinite lives.  Interest expense represents the cost ofinterest expense on debt and capital leases net of interest income on investedassets.

 

**Results of operations as a percentage of sales**

 

Thefollowing table sets forth results of our operations expressed as a percentageof sales for the thirteen weeks ended March 30, 2010 and March 31,2009:

 

18

----

Tableof Contents

 
| ** **                         | ** ** | **Thirteen Weeks Ended** | ** ** |
|------------------------------------|------------|--------------------------|------------|
| ** **                         | ** ** | **March 30, 2010**  | ** ** | **March 31, 2009** | ** ** |
|                               |       |                     |       |   |   |
| Restaurant  revenue                |       | 100.0                    | %          | 100.0 | % |
|                               |       |                     |       |   |   |
| Cost  of sales:                    |       |                     |       |   |   |
| Food,  beverage and retail         |       | 27.4                     |       | 27.2 |   |
| Labor                              |       | 34.6                     |       | 35.2 |   |
| Direct  restaurant operating       |       | 14.5                     |       | 14.9 |   |
| Occupancy                          |       | 9.8                      |       | 7.3 |   |
| Total  cost of sales               |       | 86.2                     |       | 84.6 |   |
|                               |       |                     |       |   |   |
| Pre-opening                        |       | —                   |       | 0.9 |   |
| General  and administrative        |       | 7.0                      |       | 9.6 |   |
| Depreciation  and amortization     |       | 6.6                      |       | 8.0 |   |
| Exit  or disposal activities       |       | 0.6                      |       | 2.0 |   |
| (Gain)  loss on disposal of assets |       | (0.2                     | )          | 0.0 |   |
| Operating  loss                    |       | (0.2                     | )          | (5.1 | ) |
|                               |       |                     |       |   |   |
| Interest:                          |       |                     |       |   |   |
| Income                             |       | 0.0                      |       | 0.0 |   |
| Expense                            |       | (3.8                     | )          | (7.6 | ) |
| Net  interest expense              |       | (3.8                     | )          | (7.6 | ) |
|                               |       |                     |       |   |   |
| Net  loss                          |       | (4.0                     | )%         | (12.7 | )% |

 

Certain percentageamounts do not sum due to rounding.

 

**Critical Accounting Policies**

 

Our critical accounting policies are those that require significantjudgment.  There have been no materialchanges to the critical accounting policies previously reported in our 2009Annual Report on Form 10-K filed with the Securities and ExchangeCommission on March 22, 2010.

 

**Resultsof operations****for the thirteen weeks ended March 30, 2010 and March 31,2009**

 

**Revenue**

 

We generated $22,239,363 and$21,424,701 of revenue during the first quarters of 2010 and 2009,respectively.  The 3.8% increase inrevenue was due to the additional six operating weeks as well as the 8.6%increase in guest traffic in the first quarter of 2010 compared to the firstquarter of 2009.  Throughout 2009 andparticularly in the last half of the year, we began heavy discounting and amarketing program to drive guest traffic back into the restaurants.  Although the discounting reduced our averagecheck, our guest traffic improved in late 2009 and the first quarter of2010.  Comparable restaurant revenue,which includes restaurants in operation over 18 months, increased 2.1% from thefirst quarter of 2009 to the first quarter of 2010, primarily due to the 6.7%increase in guest traffic at these restaurants. The average weekly revenue per restaurant at our comparable restaurantsincreased $1,389 from $64,789 in the first quarter of 2009 to $66,178 in thefirst quarter of 2010.

 

19

----

Table of Contents

 

We expect that restaurantrevenue will vary from quarter to quarter. We anticipate continued seasonal fluctuations in restaurant revenue duein part to increased outdoor seating and generally favorable weather conditionsat many of our locations during the summer months.  Due to the honeymoon effect that periodicallyoccurs with the opening of a restaurant, we expect the timing of any futurerestaurant openings to cause fluctuations in restaurant revenue.  Additionally, other factors outside of ourcontrol, such as inclement weather, timing of holidays, consumer confidence inthe economy and changes in consumer preferences may affect our future revenue.

 

**Restaurant costs**

** **

***Foodand beverage***

** **

Our food and beverage costs, as a percentageof revenue, increased 0.2% to 27.4% in the first quarter of 2010 from 27.2% inthe first quarter of 2009.  While we didexperience slight cost increases primarily in chicken and produce, such costswere offset in part by decreases in wine, liquor and soft drink costs.  While pricing negotiations with our suppliershave reduced our exposure to commodity price increases, we do expect that ourfood and beverage costs will continue to vary going forward due to numerousvariables, including seasonal changes in food and beverage costs for which wedo not have contracted pricing, fluctuations within commodity-priced goods andguest preferences.  We periodicallycreate new menu offerings and introduce new craft brewed beers based upon guestpreferences.  Although such menumodifications may temporarily result in increased food and beverage cost, webelieve we are able to offset such increases with our weekly specials whichprovide variety and value to our guests. Our varieties of craft brewed beer, which we believe we can produce atlower cost than beers we purchase for resale, also enable us to keep our foodand beverage costs low while fulfilling guest requests and building customerloyalty.

 

***Labor***

 

Labor expense consists ofrestaurant management salaries, hourly staff payroll costs, otherpayroll-related items including management bonuses, and non-cash stock-basedcompensation expense.  Our experience todate has been that staff labor costs associated with a newly opened restaurant,for approximately its first four to six months of operation, are greater thanwhat can be expected after that time, both in aggregate dollars and as apercentage of revenue.

 

Our labor costs, as apercentage of revenue, decreased 0.6% to 34.6% in the first quarter of 2010from 35.2% in the first quarter of 2009. We have not opened additional restaurants since the first quarter of2009, and therefore did not incur additional labor costs typically associatedwith newly opened restaurants in the first quarter of 2010.  Additionally, we have trained our managers ona number of operational metrics and initiatives focused on manageraccountability and internal development of restaurant-level staff to reducelabor costs as a percentage of revenue.

 

We expect that labor costswill vary as minimum wage laws, local labor laws and practices, andunemployment rates vary from state to state, as will hiring and trainingexpenses.  We believe that retaining goodemployees and more experienced staff ensures high quality guest service and mayreduce hiring and training costs.

 

***Direct restaurant operating***

 

Operating supplies, repairsand maintenance, utilities, promotions and restaurant-level administrativeexpense represent the majority of our direct restaurant operating expense, asubstantial portion of which is fixed or indirectly variable.  Our direct restaurant operating expense as apercentage of revenue decreased 0.4% to 14.5% in the first quarter of 2010 from14.9% in the first quarter of 2009. Decreases in costs of utilities and repair and maintenance were offsetin part by the increase in advertising costs as we continued the marketinginitiatives we began in 2009.

 

20

----

Tableof Contents

 

We continue to seek ways toreduce our direct operating costs going forward including additional pricingnegotiations and the elimination of waste.

 

***Occupancy***

 

Our occupancy costs, whichinclude both fixed and variable portions of rent, common area maintenancecharges, property insurance and property taxes, increased 2.5% as a percentageof revenue to 9.8% in the first quarter of 2010 from 7.3% in the first quarterof 2009.  Our occupancy cost increasedsignificantly in the fourth quarter of 2009 as leases at nine of therestaurants we operate were converted from capital leases to operating leasesas a result of lease amendments entered into in October 2009.  Expense related to those leases is now anoccupancy cost included in rent expense instead of interest.  Also included in our rent expense is thedifference between our current rent payments and straight-line rent expenseover the initial lease term.  Thisnon-cash rent expense of $290,574 and $74,112 is included in occupancy costs inthe first quarters of 2010 and 2009, respectively.  The $216,462 increase in non-cash rentexpense was due primarily to the one and two-year rent reductions provided bycertain of our landlords.

 

**Pre-o****pening**

 

Pre-opening costs, which areexpensed as incurred, consist of expenses related to hiring and training theinitial restaurant workforce, wages and expenses of a new restaurant openingteam during periods of expansion, rental costs incurred during the constructionperiod and certain other direct costs associated with opening newrestaurants.  Pre-opening costs,excluding construction-period rent, are primarily incurred in the month of, andtwo months prior to, restaurant opening.

 

In the first quarter of2009, our pre-opening costs of $192,929 were related to the restaurant weopened in Indianapolis, Indiana in February 2009.  We have not opened additional restaurantssince that time, and therefore incurred no pre-opening costs in the first quarterof 2010.

 

**General and administrative**

 

General and administrativeexpense includes all salaries and benefits, including non-cash stock-basedcompensation, associated with our corporate staff that is responsible foroverall restaurant quality, any future expansion into new locations, financialcontrols and reporting, restaurant management recruiting, management training,excess capacity costs related to our beer production facility, and salaries andexpenses of our new restaurant opening team when it was not dedicated to aparticular restaurant opening.  Othergeneral and administrative expense includes advertising, professional fees,investor relations, office administration, centralized accounting system costs andtravel by our corporate management.

 

General and administrativeexpense decreased $508,313 to $1,556,003 in the first quarter of 2010 from$2,064,316 in the first quarter of 2009. As a percentage of revenue, general and administrative expenses decreased2.6% in the first quarter of 2010 over the first quarter of 2009.  The primary sources of such decrease wereexpenses related to recruiting, consulting, compensation and travelexpense.  Non-cash stock-based compensationincluded in general and administrative expense was $25,536 and $37,972 in thefirst quarters of 2010 and 2009, respectively.

 

We continue to seek ways toreduce our general and administrative expenses through additional pricingnegotiations with our vendors.  While wehave started seeing the effects of previously renegotiated general andadministrative costs, we will closely monitor and attempt to further reducethese expenses while seeking to preserve an infrastructure that remainssuitable for our current operations. Although we may need to recruit additional personnel to providecontinued oversight of operations, we expect our turnover ratios to return tolevels more consistent with the industry, allowing us to contain ourcosts.  To the extent our turnoverincreases above our expectations, additional costs above our budgeted figurescould be incurred in our recruiting and training expenses.  We believe our general and administrativeexpense and our general and administrative expense as a percentage of revenuewill decrease in 2010 compared to 2009.

 

21

----

Tableof Contents

 

**Depreciation and amortization**

 

Depreciation andamortization expense decreased $229,601 to $1,476,976 in the first quarter of2010 from $1,706,577 in the first quarter of 2009, due principally to thereclassification of the leases at nine of the restaurants we operate fromcapital leases to operating leases in October 2009.  As a percentage of revenue, depreciationexpense decreased 1.4% to 6.6% in the first quarter of 2010 from 8.0% in thefirst quarter of 2009.

 

**Exit or disposal activities**

 

In August 2008, we closed our Rogers,Arkansas restaurant.  Since opening in October 2007,the restaurant failed to generate positive cash flow and had approximately $1.4million of net loss.  We believe theclosure of this restaurant has allowed management to focus capital andpersonnel resources on our other restaurants in order to increase futureoperating efficiencies and cash flow.  Weare working to find a replacement tenant for the location, for which we arebound by a lease which expires in December 2018.  Costs incurred in the first quarters of 2010and 2009 in connection with this closure include costs to maintain the facilityof approximately $116,341 and $132,996, respectively.  We will incur ongoing costs such asutilities, landscape and maintenance and general liability insurance until weare able to find a replacement tenant. We recorded a non-cash lease terminationliability of $1,762,689 based on management’s estimate of the fair value ofthese obligations.  This requiredmanagement to estimate the present value of the future minimum leaseobligations offset by the estimated sublease rentals that could be reasonablyobtained for the property.  Amortizationof this sublease liability was $32,740 and $4,916 in the first quarters of 2010and 2009, respectively.  All costsrelated to the closing of the Rogers restaurant, including lease payments, arereflected in our statements of operations as “exit or disposal activities”.  Pursuant to the terms of the lease our annuallease payments for the Rogers site were $405,000 as of March 30, 2010, andour ongoing costs to maintain the property were approximately $5,000 permonth.  As of March 30, 2010, ourfuture undiscounted cash payments under the terms of this lease wereapproximately $3.9 million.

 

As part of the Master Agreement we enteredinto with the Dunham Entities in February 2009, we agreed to reimburse DCMfor any out-of-pocket expenses incurred, reduced by net proceeds from the saleof the real estate or lease income associated with the Rogers, Arkansas siteand the site at Troy, Michigan upon which we decided not build arestaurant.  As March 30, 2010, thecarrying cost of the land approximated $16,000 per month and has been recordedin “exit and disposal activities” in our statement of operations.  We have concluded that as of March 30,2010, it is probable we will need to reimburse DCM approximately $486,000 ofsuch costs related to the Troy, Michigan site.

 

Reimbursement of costs related to thesesites, including the carrying cost of the related land, will be amortized andpayable to DCM over a 60-month period commencing January 2011, at a 6%annual interest rate.  The actual amountdue DCM could fluctuate due to changes in the economy.

 

**Interest**

 

Net interest expense consists of interest expense on capital leases andlong-term debt, net of interest earned from cash on hand.  Interest expense decreased $791,573 to$839,385 in the first quarter of 2010 from $1,630,958 in the first quarter of2008 due to capital lease reductions from our landlords and equipment financersand the extinguishment of approximately $15.0 million equipment lease debtthrough the issuance of common stock. Additionally, in October 2009, leases at nine of the restaurants weoperate were converted from capital leases to operating leases.  Expense related to such leases that wasrecorded as interest expense in the first quarter of 2009, was recorded as anoccupancy cost included in rent in the first quarter of 2010.  Interest income decreased $1,199 in the firstquarter of 2010 over 2009 due to the reduction of cash on hand.

 

**Liquidity and capital resources**

 

Asof March 30, 2010, we had $1,536,284 of cash and a working capital deficitof $8,215,687 compared to $1,743,599 of cash and a working capital deficit of$8,529,947 at December 29, 2009.

 

22

----

Tableof Contents

 

During the thirteen weeks ended March 30,2010, we generated $303,677 of net cash from operating activities.  We used $126,772 of cash to purchaseequipment and other assets, made payments aggregating $269,822 on our debt andcapital lease obligations and used $114,398 of cash related to the issuance ofcommon stock to DHW.

 

During the thirteen weeks ended March 31,2009, we obtained proceeds of $1,800,000 pursuant to a capital lease agreementand loan agreement and made payments aggregating $722,239 on our debt andcapital lease obligations.  We used$1,995,753 of net cash in operating activities and $326,493 of net cash topurchase equipment and other assets.

 

InDecember 2009, our board of directors approved aone-for-six-share-combination of our common stock which became effective January 13,2010.  As a result of this reverse stocksplit, every six shares of our common stock that were issued and outstanding asof January 13, 2010, were automatically combined into one issued andoutstanding share without any change in the par value of such shares, and thenumber of authorized but unissued shares of our common stock wereproportionally reduced. A proportionate adjustment was also made to ouroutstanding stock options and warrants. No fractional shares were issued in connection with this reverse stocksplit.  Shareholders who were entitled tofractional shares received cash in lieu of receiving fractional shares.  All references within this document to lossper share reflect this reverse stock split. Additionally, the number of common shares, stock options and warrants,and the price per common share, stock option and warrant, reflect this reversestock split.

 

Along with DCM, we continueto seek to lower the cost of our land leases at several locations.  In some instances, our company and DCM havenot paid rent during this negotiating period. We accrue for any non-paid rent during this period under “deferred rents”on the balance sheet (see Note 7 to our condensed consolidated financial statementsregarding amounts due landlords).  To theextent the parties are unable to reach agreements to reduce lease costs, legalaction could be brought by lessors that may result in material adverseconsequences to us, DCM or both.  Suchmaterial adverse consequences could include legal actions by land owners orother landlords to terminate leases and recover delinquent and futurerents.  Additionally, if any of ourlandlords or parties from whom our landlords lease property fail financially,the ramifications upon our company and our continued occupancy of the leasedrestaurants would be uncertain.  We couldlose the future revenue from any such affected locations and lose the value ofour investment in improvements thereon if we are unable to negotiate arrangementswith new owners of the leased locations, or creditors or bankruptcy trustees ofsuch landlords.

 

Forthe quarter ended March 30, 2010, we operated at a level that will allowus to fund our existing operations. However, our ability to continue funding our operations and meet ourdebt service obligations continues to depend upon our operating performance,and more broadly, achieving budgeted revenue and operating margins, both ofwhich will be affected by prevailing economic conditions in the retail andcasual dining industries and other factors, which may be beyond ourcontrol.  If revenue or margins, or acombination of both, decrease to levels unsustainable for continuingoperations, or if we choose to develop additional locations, we will requireequity or debt financing to meet ongoing obligations.  The amount of any such required funding woulddepend upon our ability to generate working capital.  There can be no assurance that we will obtainfinancing on favorable terms or at all. If we raise additional capital through the issuance and sale of equitysecurities, the securities may be issued at prices below the market price ofour stock, and our shareholders may suffer significant dilution.  Debt financing, if available, may involvesignificant cash payment obligations, covenants and financial ratios thatrestrict our ability to operate and grow our business, and would cause us toincur additional interest expense and financing costs.  If cash flow from operations are insufficientto fund expected capital needs, or if our needs are greater than anticipatedand we are unable to obtain additional capital, we will be required torestructure debt obligations.  Thefailure to reach agreements with creditors to restructure indebtedness,including lease obligations, would have a material adverse effect upon ourbusiness and results of operations.

 

23

----

Tableof Contents

 

**Commitments**

 

*Capital Leases:*

* *

*Propertyleases*

* *

As of March 30, 2010,we operated 15 restaurants under capital lease agreements, of which one expiresin 2019, one in 2020, one in 2021, two in 2022, two in 2023, three in 2024, twoin 2026 and three in 2027, all with renewable options for additionalperiods.  Thirteen of these leaseagreements originated with the Donald A. Dunham, Jr. and entitiesaffiliated with him (collectively, the “Dunham Landlords”).  Under certain of the leases, we may berequired to pay additional contingent rent based upon restaurant sales.  At the inception and the amendment date ofeach of these leases, we evaluated the fair value of the land and buildingseparately pursuant to the FASB guidance on accounting for leases.  The land portion of these leases isclassified as an operating lease while the building portion of these leases isclassified as a capital lease because its present value was greater than 90% ofthe estimated fair value at the beginning or amendment date of the lease and/orthe lease term represents 75% or more of the expected life of the property.

 

In December 2004, weentered into a land and building lease agreement for our beer productionfacility.  This ten-year lease, whichcommenced February 1, 2005, allows us to purchase the facility at any timefor $1.00 plus the unamortized construction costs.  Because the construction costs will be fullyamortized through payment of rent during the base term, if the option isexercised at or after the end of the initial ten-year period, the option pricewill be $1.00.  As such, the lease isclassified as a capital lease.

 

InMay 2008, we entered into a 20-year net lease agreement relating to therestaurant we planned to open in Troy, Michigan.  However, in February 2009, we decidednot to build on that site, and as part of an agreement with the DunhamEntities, we will reimburse DCM for any out-of-pocket expenses incurred lessnet proceeds from the sale of the real estate or lease income associated withthe site.

 

Equipmentleases

 

As of March 30, we hadleased equipment at three of our restaurants pursuant to a lease agreement withCarlton Financial Corporation (“Carlton”). The value of the equipment financedat each of the three locations ranges from approximately $0.8 million to$1.1 million, the annual interest rate on each ranges from 12.9% to 19.6%annually and the lease will expire in October 2012.  We may purchase Carlton’s interest in all,but not less than all, of the equipment for a purchase price equal to 15% ofthe original cost of the equipment. Steven J. Wagenheim our president, chief executive officer and one ofour directors, was required to personally guarantee payments to be made toCarlton under the lease financing and our board of directors agreed tocompensate him for such guarantee.

 

In June 2007, weentered into a lease for an energy optimization system at our Maple Grove,Minnesota restaurant for approximately $30,000. This five-year lease commenced June 28, 2007, carries an annualinterest rate of approximately 11.9% and contains a bargain purchase option.

 

*Operating****Lease*:

 

The land portions of the 15property leases referenced above, 13 lease agreements of which originated withthe Dunham Landlords, are classified as operating leases because the fair valueof the land was 25% or more of the leased property at the inception of eachlease.  All scheduled rent increases forthe land during the initial term of each lease are recognized on astraight-line basis.  In addition to suchproperty leases, we have obligations under the following operating leases:

 

We operate nine restaurantsunder operating lease agreements with the Dunham Landlords.  Of such leases, one expires in 2016, one in2017 and seven in 2018.  All leases haverenewable options for additional periods and all scheduled rent increasesduring the initial term are recognized on a straight-line basis.

 

24

----

Tableof Contents

 

In January 2001, weentered into a 20-year operating lease for the land upon which we built ourFargo, North Dakota restaurant.  Underthe lease terms, we are obligated to annual rent of $72,000 plus contingentrent based upon restaurant sales.

 

We maintain our corporateoffice space under a lease agreement which expires in November 2011.  Annual rent is $72,115 with scheduled annualincreases throughout the term of the lease. Such scheduled rent increases are recognized on a straight-line basisover the term of the lease.

 

InMarch 2006, we entered into a lease agreement for the land and buildingfor our St. Louis Park, Minnesota restaurant. Rental payments for this lease are $148,625 annually.  This operating lease expires in 2016 withrenewal options for additional periods.

 

In August 2008, weceased operations at our restaurant in Rogers, Arkansas.  However, we are currently bound by the termsof lease agreement which expires in 2018. As part of an agreement with the Dunham Entities, we will reimburse DCMfor any out-of-pocket expenses incurred less net proceeds from the sale of thereal estate or lease income associated with this site.  The lease, as amended, is classified as anoperating lease as it does not meet the requirements for a capital lease.

 

*Personal Guaranties:*

* *

Our board of directors hasagreed to compensate Steven J. Wagenheim, our president, chief executiveofficer and one of our directors, for his personal guaranties of equipmentloans entered into in August 2003 and January 2004.  In addition, in August 2006, we enteredinto a lease agreement with Carlton pursuant to which we financed approximately$3.0 million of equipment.  Mr. Wagenheimwas required to personally guarantee payments to be made to Carlton under thislease financing agreement, for which our board of directors agreed tocompensate him.  The amount of annualcompensation for each of these guarantees is 3% of the balance of theobligation and is calculated and accrued based on the weighted average daily balanceof the obligation at the end of each monthly accounting period.  During the first quarters of 2010 and 2009,we recorded $10,065 and $17,787 of such compensation in general andadministrative expense, respectively, and paid $40,000 and $0 of such compensation,respectively.

 

*Employment Agreements:*

* *

*We haveentered into employment agreements with Steven J. Wagenheim, our president andchief executive officer; James G. Gilbertson, our chief financial officer; andDarius H. Gilanfar, our chief operating officer, providing for their employmenton an at-will basis. Each agreement, as amended in October 2009, providesthat the executive will have employment for a term of one year from theamendment date, and will be entitled to severance benefits that include oneyear of base compensation if his employment is terminated without cause or forgood reason, as defined therein, in addition to the balance of the one-yearterm, if terminated prior to the end of such term.  Each employment agreement is automaticallyextended for a one-year term unless either our company or the executive givesat least 60 days’ notice to the other of an intent not to extend. Theagreements also provide for a base annual salary which may be increased by ourboard of directors, incentive compensation as determined by our compensationcommittee from time to time, and participation in our company’s other employeebenefit plans. In addition, each agreement includes change in controlprovisions that entitle the executive to receive severance pay equal to 12months of salary if there is a change in control of our company and hisemployment terminates without cause or for good reason, as defined in theagreement.  Each executive has alsoagreed to certain nondisclosure provisions during the term of his employmentand any time thereafter, and certain non-competition, non-recruitment and/ornon-interference provisions during the term of his employment and for a certainperiod thereafter. As of May 7, 2010, the current annual base salaries ineffect for such executives under the foregoing employment agreements were asfollows: Mr. Wagenheim ($300,000), Mr. Gilbertson ($225,000), and Mr. Gilanfar($202,860).*

 

25

----

Tableof Contents

 

*Development Agreement:*

* *

In April 2008, we enteredinto a development agreement with United Properties InvestmentLLC (“United Properties”) for the development of upto 22 restaurants to be built between 2009 and 2012.  United Properties will be responsible for allcosts related to the land and building of each restaurant.  The development agreementprovides for a cooperative process between United Properties and our managementfor the selection of restaurant sites and the development of restaurants onthose sites and scheduling for the development and construction of eachrestaurant once a location is approved.  The annual lease rate for fee-simple land andbuilding developments will be 9.5% and we will have the right of first offer topurchase these restaurants. Additionally, in the event United Properties sells one of the buildingsthat it develops for us at an amount in excess of the threshold agreed to bythe parties in the agreement, then we will share in the profits of thatsale.  We assume no liability in theevent United Properties sells a building at a loss.  We are not bound to authorize theconstruction of restaurants during that time period, but generally cannot useanother developer to develop or own a restaurant as long as the developmentagreement is in effect.  We can, however,use another developer if United Properties declines to build a particularrestaurant.  We currently have no sitesunder development.

 

*Off- balance sheet arrangements:*

 

We have not entered in to any off-balance sheetarrangements as it is not our business practice to do so.

 

*Summary of contractual obligations:*

 

Thefollowing table summarizes our obligations under contractual agreements and thetimeframe within which payments on such obligations are due.  This table does not include amounts relatedto contingent rent as such future amounts are not determinable.  In addition, whether we would incur anyadditional expense on our employment agreements depends upon the existence of achange in control of the company coupled with a termination of employment orother unforeseeable events.  Therefore,neither contingent rent nor severance expense has been included in thefollowing table.

 
| ** **                                       | ** ** | **Payment due by period** | ** **  |
|--------------------------------------------------|------------|---------------------------|-------------|
| ** **                                       | ** ** | ** **                | ** **  | **Fiscal Year** | ** ** | **Fiscal Years** | ** ** | **Fiscal Years** | ** ** | **Fiscal Years** | ** ** |
| **Contractual  Obligations**                     | ** ** | **Total**                 | ** **  | **2010** | ** ** | **2011-2012** | ** ** | **2013-2014** | ** ** | **Thereafter** | ** ** |
| Long-term  debt, principal                       |       | $                         | 2,395,635   |   | $ | 265,327 |   | $ | 1,896,505 |   | $ | 9,617 |   | $ | 224,186 |   |
| Interest  on long-term debt                      |       | 462,482                   |        | 145,871 |   | 143,155 |   | 36,692 |   | 136,765 |   |
| Capital  lease obligations, including interest   |       | 56,497,106                |        | 3,014,612 |   | 8,101,611 |   | 7,610,633 |   | 37,770,250 |   |
| Operating  lease obligations, including interest |       | 67,888,594                |        | 5,360,627 |   | 12,373,187 |   | 12,816,692 |   | 37,338,088 |   |
| Purchase  contracts*                             |       | 1,246,066                 |        | 265,633 |   | 635,430 |   | 345,004 |   | — |   |
| Loan  guarantee                                  |       | 103,692                   |        | 88,238 |   | 13,644 |   | 1,810 |   | — |   |
| Total  obligations                               |       | $                         | 128,593,575 |   | $ | 9,140,307 |   | $ | 23,163,531 |   | $ | 20,820,448 |   | $ | 75,469,289 |   |

 

----

*While we arecontractually obligated to make these purchases, we have the contractual rightto defer such  purchases into lateryears.  However, if we defer suchpurchases into later years, we may incur additional charges.

 

Certain amounts donot sum due to rounding.

 

26

----

Tableof Contents

 

Based on our currentoperating trends, we believe we have sufficient capital to operate our businessduring 2010.  If, however, the existinglevels of revenue and margins, or a combination of both, decrease to levelsunsustainable for continuing operations, or if we choose to develop additionallocations, we will require equity or debt financing to meet ongoingobligations.

 

*Recent accounting pronouncements:*

 

Seethe “Recently issued accounting standards” section of Note 1 to our condensedconsolidated financial statements for a summary of new accounting literature.

 

**Seasonality**

 

We expect that our sales and earnings willfluctuate based on seasonal patterns.  Weanticipate that our highest sales and earnings will occur in the second andthird quarters due to the milder climate and availability of outdoor seatingduring those quarters in our markets.

 

**Inflation**

** **

Theprimary inflationary factors affecting our operations are food, supplies andlabor costs.  A large percentage of ourrestaurant personnel is paid at rates based on the applicable minimum wage, andincreases in the minimum wage directly affect our labor costs.  In the past, we have been able to minimizethe effect of these increases through menu price increases and otherstrategies.  To date, inflation has nothad a material impact on our operating results.

 

**ITEM 3                   Quantitativeand Qualitative Disclosures about Market Risk**

 

Our company is exposed tomarket risk from changes in interest rates on debt and changes in commodityprices.

 

*Changesin interest rates:*

 

Pursuantto the terms of our long-term debt agreement with an independent financialinstitution, we will have a balloon payment due of approximately $1.1 millionin 2011.  If it becomes necessary torefinance such balloon balance, we may not be able to secure financing at thesame interest rate.  The effect of ahigher interest rate would depend upon the negotiated financing terms.

 

*Changes in commodity prices:*

 

Many of the food productsand other commodities we use in our operations are subject to price volatilitydue to market supply and demand factors outside of our control.  Fluctuations in commodity prices and/orlong-term changes could have an adverse effect on us.  These commodities are generally purchasedbased upon market prices established with vendors.  To manage this risk in part, we have enteredinto fixed price purchase commitments, with terms typically up to one year, formany of our commodity requirements.  Wehave entered into contracts through 2014 with certain suppliers of rawmaterials (primarily hops) for minimum purchases both in terms of quantity andpricing.   As of March 30, 2010, ourfuture obligations under such contracts aggregated approximately $1.2 million.

 

Although a large nationaldistributor is our primary supplier of food, substantially all of our food andsupplies are available from several sources, which helps to control commodityprice risks.  Additionally, we have theability to increase menu prices, or vary the menu items offered, in response tofood product price increases.  If,however, competitive circumstances limit our menu price flexibility, ourmargins could be negatively impacted.

 

Ourcompany does not enter into derivative contracts either to hedge existing risksor for speculative purposes.

 

27

----

Table of Contents

 

**ITEM 4                   Controlsand Procedures**

 

*Evaluationof disclosure controls and procedures*

 

We maintain a system ofdisclosure controls and procedures that is designed to ensure that informationrequired to be disclosed in our Exchange Act reports is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosures.

 

Under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, we conducted an evaluation of our disclosure controlsand procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)). Based on this evaluation, our Chief Executive Officer and our ChiefFinancial Officer concluded that, as of March 30, 2010, our disclosurecontrols and procedures were effective.

 

*Changes in internal control over financial reporting*

 

There were no changes in our internal controlover financial reporting that occurred during the quarter ended March 30,2010 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II OTHERINFORMATION**

 

**ITEM 1                   LegalProceedings**

 

From time to time, lawsuits are threatened orfiled against us in the ordinary course of business.  Such lawsuits typically involve claims fromcustomers, former or current employees, and others related to issues common tothe restaurant industry.  A number ofsuch claims may exist at any given time. Although there can be no assurance as to the ultimate disposition ofthese matters, it is management’s opinion, based upon the information availableas of May 7, 2010,****that theexpected outcome of these matters, individually or in the aggregate, will nothave a material adverse effect on the results of operation, liquidity orfinancial condition of our company.  Inaddition, some property owners have brought actions against us or our landlordsarising out of our withholding of rent during the period in which we areattempting to negotiate the lease terms. We believe their actions have been stayed and will continue in abeyancewhile active negotiations are taking place with property owners.

 

**ITEM 1A                RiskFactors**

 

Therehave been no material changes with respect to the risk factors disclosed in ourAnnual Report on Form 10-K for the fiscal year ended December 29,2009, filed with the Securities and Exchange Commission on March 22, 2010,with the exception of the following additions:

 

**If our primary landlord, DCM, or any other of our landlords should failfinancially, the ramifications upon our company and the continued occupancy ofcertain restaurants would be uncertain.**  In the event of sucha financial failure, we could lose the future revenue from any such affectedlocations and lose the value of our investment in improvements thereon, if weare unable to negotiate arrangements with new owners of the leased locations,or creditors or bankruptcy trustees of such landlords.  Four of our restaurants are leased fromGeneral Growth Properties or its affiliates, which has filed to reorganizeunder federal bankruptcy law.  Incurringany of the above-described losses could materially adversely affect ourbusiness and results of operations.

 

**Our strategy to withhold rent to certain of our landlords during rentnegotiations could result in lease terminations and/or the award of delinquentand future rents.**  We continueto negotiate with our

 

28

----

Tableof Contents

 

landlordsfor reduced lease costs.  In someinstances, we and DCM have not paid rent during this negotiating period.  If the parties cannot resolve the leaseissues, legal action could be taken that could result in material adverseconsequences, including lease terminations and/or the recovery of delinquentand future rents.

 

**ITEM 2                   UnregisteredSales of Equity Securities and Use of Proceeds**

 

None.

 

**ITEM 3                   Defaultsupon Senior Securities**

 

None.

 

**ITEM 4                  ****(Removedand Reserved)**

 

**ITEM 5                   Other Information**

 

*2010 Annual Meeting of Shareholders*

 

Wecurrently expect to hold our 2010 annual meeting of shareholders on August 25,2010.  In our proxy statement relating toour 2009 annual meeting of shareholders, we disclosed the deadlines by whichshareholders must notify us of (1) any proposals to be considered forinclusion in the proxy materials to be distributed by us for our 2010 annualmeeting of shareholders and (2) any proposals to be presented forconsideration at our 2010 annual meeting of shareholders.  Specifically, we indicated that shareholderproposals must be received by us no later than January 12, 2010 to beconsidered for inclusion in our proxy materials and no later than March 28,2010 to be presented for consideration at our meeting.

 

Becausethe expected meeting date for our 2010 annual meeting of shareholdersrepresents a change of more than 30 days from the anniversary of our 2009annual meeting of shareholders held on June 23, 2009, any shareholderproposal that is submitted for consideration for inclusion in the proxymaterials to be distributed by us for our 2010 annual meeting of shareholderspursuant to Rule 14a-8 under the Exchange Act must be received by us atour principal executive offices a reasonable time before we begin to print andmail our proxy materials.  Furthermore,for the same reason, any shareholder proposal that is to be presented forconsideration at our 2010 annual meeting of shareholders outside the processesof Rule 14a-8 must be received by us at our principal executive offices areasonable time before we send our proxy materials for our meeting.

 

Wehave set the date for receipt of proposals to be considered for inclusion inour proxy materials as the close of business on May 21, 2010.  We have set the date of receipt of proposalsto be presented for consideration at our meeting as the close of business on June 7,2010.  All proposals must be sent bycertified mail, return receipt requested, and must be received at the principalexecutive offices of Granite City Food & Brewery Ltd., 5402Parkdale Drive, Suite 101, Minneapolis, Minnesota 55416, Attention: MonicaA. Underwood, Vice President of Finance and Secretary.  All proposals must conform to the rules andregulations of the SEC.  Under SEC rules,if a shareholder notifies us of his or her intent to present a proposal forconsideration at the 2010 annual meeting of shareholders after June 7,2010, we, acting through the persons named as proxies in the proxy materialsfor such meeting, may exercise discretionary authority with respect to suchproposal without including information regarding such proposal in our proxymaterials.

 

Our bylaws provide that in order for ashareholder to nominate a candidate for election as a director at an annualmeeting of shareholders, the shareholder must generally notify us in writing atour principal address not later than 90 days in advance of suchmeeting.  A copy of our bylaws may beobtained from Monica A. Underwood, Vice President of Finance and Secretary, bywritten request to our principal executive offices.

 

29

----

Tableof Contents

 

**ITEM 6                   Exhibits**

 

See “Index to Exhibits.”

 

30

----

Tableof Contents

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|                                                        | GRANITE CITY  FOOD & BREWERY LTD. |
|-------------------------------------------------------------|--------------------------------------------|
|                                                        |                                       |
|                                                        |                                       |
| Date:       May 10, 2010 | By:                                        | /s/ James G. Gilbertson |
|                                                        |                                       | James G. Gilbertson |
|                                                        |                                       | Chief Financial Officer |
|                                                        |                                       | (As Principal Financial Officer and Duly Authorized  Officer of Granite City Food & Brewery Ltd.) |

 

31

----

Tableof Contents

 

**INDEX TO EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                         |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                    |
| 3.1                 |       | Articles  of Incorporation of the Company, as amended (incorporated by reference to our  Registration Statement on Form S-3, filed on December 30, 2009  (File No. 333-164065)).                         |
|                |       |                                                                                                                                                                                                                    |
| 3.2                 |       | Amended  and Restated Bylaws of the Company, dated May 2, 2007 (incorporated by  reference to our Current Report on Form 8-K, filed on May 4, 2007  (File No. 000-29643)).                          |
|                |       |                                                                                                                                                                                                                    |
| 4.1                 |       | Reference  is made to Exhibits 3.1 and 3.2.                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                    |
| 4.2                 |       | Specimen  common stock certificate (incorporated by reference to our Current Report on  Form 8-K, filed on September 20, 2002 (File No. 000-29643)).                                                     |
|                |       |                                                                                                                                                                                                                    |
| 31.1                |       | Certification  by Steven J. Wagenheim, President and Chief Executive Officer of the Company,  pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|                |       |                                                                                                                                                                                                                    |
| 31.2                |       | Certification  by James G. Gilbertson, Chief Financial Officer of the Company, pursuant to  Exchange Act Rule 13a-14(a), 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 James G. Gilbertson, 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.                    |

 

32

----