Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

 

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**FORM 10-Q**

 
| **x**  | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 24, 2008** |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                 |
| **o**  | ** ** | **TRANSITION  REPORT PURSUANT TO 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  of Incorporation or Organization)                                                                                                                              | ** ** | (I.R.S. Employer  Identification No.) |
|                                                                                                                                                                                          | ** ** |                                  |
| **5402  Parkdale Drive, Suite 101  Minneapolis, Minnesota  55416  (952) 215-0660**(Address of Principal 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 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 x | Non-accelerated filer o                      | Smaller  reporting company o |
|----------------------------------|---------------------|----------------------------------------------|------------------------------|
|                             |                | (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 July 29, 2008, the issuer had outstanding 16,197,849****shares of common stock.

 

 

 

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**TABLE OFCONTENTS**

 
| ** **             | ** **                                                                                                                              | **Page** |
|------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|----------|
| ** **             | ** **                                                                                                                              |     |
| **PART I**        | **FINANCIAL INFORMATION**                                                                                                               | 1        |
|                   |                                                                                                                                    |     |
| ITEM 1                 | Financial Statements                                                                                                                    | 1        |
|                   |                                                                                                                                    |     |
|                   | Condensed  Consolidated Balance Sheets as of June 24, 2008 and December 25,  2007                                             | 1        |
|                   |                                                                                                                                    |     |
|                   | Condensed Consolidated  Statements of Operations for the Thirteen and Twenty-six weeks ended  June 24, 2008 and June 26, 2007 | 2        |
|                   |                                                                                                                                    |     |
|                   | Condensed  Consolidated Statements of Cash Flows for the Twenty-six weeks ended  June 24, 2008 and June 26, 2007              | 3        |
|                   |                                                                                                                                    |     |
|                   | Notes to Condensed Consolidated Financial Statements                                                                                    | 4        |
|                   |                                                                                                                                    |     |
| ITEM 2                 | Management’s Discussion and Analysis of Financial Condition  and Results of Operations                                             | 14       |
|                   |                                                                                                                                    |     |
| ITEM 3                 | Quantitative  and Qualitative Disclosures about Market Risk                                                                             | 26       |
|                   |                                                                                                                                    |     |
| ITEM 4                 | Controls and  Procedures                                                                                                                | 26       |
|                   |                                                                                                                                    |     |
| **PART II**       | **OTHER INFORMATION**                                                                                                                   | 27       |
|                   |                                                                                                                                    |     |
| ITEM 1                 | Legal Proceedings                                                                                                                       | 27       |
|                   |                                                                                                                                    |     |
| ITEM 1A                | Risk Factors                                                                                                                            | 27       |
|                   |                                                                                                                                    |     |
| ITEM 2                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                            | 27       |
|                   |                                                                                                                                    |     |
| ITEM 3                 | Defaults  upon Senior Securities                                                                                                        | 27       |
|                   |                                                                                                                                    |     |
| ITEM 4                 | Submission  of Matters to a Vote of Security Holders                                                                                    | 27       |
|                   |                                                                                                                                    |     |
| ITEM 5                 | Other Information                                                                                                                       | 27       |
|                   |                                                                                                                                    |     |
| ITEM 6                 | Exhibits                                                                                                                                | 27       |
|                   |                                                                                                                                    |
| **SIGNATURES**         | 28                                                                                                                                      |
|                   |                                                                                                                                    |
| **INDEX  TO EXHIBITS** | 29                                                                                                                                      |

 

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**PART I                  FINANCIALINFORMATION**

** **

**ITEM 1  Financial Statements**

 

**GRANITE CITY FOOD & BREWERY LTD.**

# **CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                             | ** ** | **June 24,** | ** ** | **December 25,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                             | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| **ASSETS:**                                                                                                                                                                            |       |              |       |                  |       |
| Current assets:                                                                                                                                                                        |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                             |       | $                 | 3,766,559  |                  | $          | 7,076,835 |   |
| Inventory                                                                                                                                                                              |       | 848,507           |       | 827,370               |       |
| Prepaids and other                                                                                                                                                                     |       | 486,366           |       | 519,505               |       |
| Total current  assets                                                                                                                                                                  |       | 5,101,432         |       | 8,423,710             |       |
|                                                                                                                                                                                   |       |              |       |                  |       |
| Prepaid rent,  net of current portion                                                                                                                                                  |       | 485,574           |       | 514,503               |       |
| Property and  equipment, net                                                                                                                                                           |       | 76,346,376        |       | 72,410,886            |       |
| Intangible and  other assets                                                                                                                                                           |       | 1,073,966         |       | 1,061,691             |       |
| Total assets                                                                                                                                                                           |       | $                 | 83,007,348 |                  | $          | 82,410,790 |   |
|                                                                                                                                                                                   |       |              |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY:**                                                                                                                                        |       |              |       |                  |       |
| Current  liabilities:                                                                                                                                                                  |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                       |       | $                 | 2,357,745  |                  | $          | 3,628,444 |   |
| Accrued expenses                                                                                                                                                                       |       | 6,524,246         |       | 6,473,894             |       |
| Deferred rent,  current portion                                                                                                                                                        |       | 200,768           |       | 195,707               |       |
| Long-term debt,  current portion                                                                                                                                                       |       | 300,090           |       | 284,620               |       |
| Capital lease  obligations, current portion                                                                                                                                            |       | 1,774,633         |       | 1,509,342             |       |
| Total current  liabilities                                                                                                                                                             |       | 11,157,482        |       | 12,092,007            |       |
|                                                                                                                                                                                   |       |              |       |                  |       |
| Deferred rent,  net of current portion                                                                                                                                                 |       | 2,466,171         |       | 2,189,278             |       |
| Long-term debt,  net of current portion                                                                                                                                                |       | 1,581,310         |       | 1,732,416             |       |
| Capital lease  obligations, net of current portion                                                                                                                                     |       | 57,386,695        |       | 48,719,728            |       |
| Total  liabilities                                                                                                                                                                     |       | 72,591,658        |       | 64,733,429            |       |
|                                                                                                                                                                                   |       |              |       |                  |       |
| Commitments and  contingencies                                                                                                                                                         |       |              |       |                  |       |
| Shareholders’  equity:                                                                                                                                                            |       |              |       |                  |       |
| Common stock,  $0.01 par value, 90,000,000 shares authorized; 16,197,849 and 16,158,945  shares issued and outstanding at June 24, 2008 and December 25,  2007, respectively |       | 161,978           |       | 161,589               |       |
| Additional  paid-in capital                                                                                                                                                            |       | 43,562,502        |       | 43,264,493            |       |
| Accumulated  deficit                                                                                                                                                                   |       | (33,308,790       | )          | (25,748,721           | )          |
| Total  shareholders’ equity                                                                                                                                                       |       | 10,415,690        |       | 17,677,361            |       |
|                                                                                                                                                                                   |       |              |       |                  |       |
| Total  liabilities and shareholders’ equity                                                                                                                                       |       | $                 | 83,007,348 |                  | $          | 82,410,790 |   |

 

See notes to condensed consolidated financialstatements.

 

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**GRANITE CITY FOOD & BREWERY LTD.**

# **CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                  | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                                  | ** ** | **June 24,**                  | ** ** | **June 26,**                    | ** ** | **June 24,** | ** ** | **June 26,** | ** ** |
| ** **                                  | ** ** | **2008**                           | ** ** | **2007**                             | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                        |       |                               |       |                                 |       |   |   |   |   |
| Restaurant  revenues                        |       | $                                  | 25,098,838 |                                 | $          | 18,453,954 |   | $ | 49,118,323 |   | $ | 36,636,146 |   |
|                                        |       |                               |       |                                 |       |   |   |   |   |
| Cost of sales:                              |       |                               |       |                                 |       |   |   |   |   |
| Food, beverage  and retail                  |       | 7,601,146                          |       | 5,524,901                            |       | 15,125,214 |   | 10,919,623 |   |
| Labor                                       |       | 9,298,112                          |       | 6,544,272                            |       | 18,650,135 |   | 13,151,175 |   |
| Direct  restaurant operating                |       | 3,553,310                          |       | 2,491,215                            |       | 7,133,346 |   | 4,934,154 |   |
| Occupancy                                   |       | 1,618,074                          |       | 1,103,348                            |       | 3,164,972 |   | 2,274,892 |   |
| Total cost of  sales                        |       | 22,070,642                         |       | 15,663,736                           |       | 44,073,667 |   | 31,279,844 |   |
|                                        |       |                               |       |                                 |       |   |   |   |   |
| Pre-opening                                 |       | 246,701                            |       | 416,341                              |       | 830,074 |   | 512,182 |   |
| General and  administrative                 |       | 2,780,362                          |       | 1,907,641                            |       | 5,484,887 |   | 3,643,946 |   |
| Depreciation and  amortization              |       | 1,613,411                          |       | 1,122,405                            |       | 3,175,057 |   | 2,242,728 |   |
|                                        |       |                               |       |                                 |       |   |   |   |   |
| Operating loss                              |       | (1,612,278                         | )          | (656,169                             | )          | (4,445,362 | ) | (1,042,554 | ) |
|                                        |       |                               |       |                                 |       |   |   |   |   |
| Interest:                                   |       |                               |       |                                 |       |   |   |   |   |
| Income                                      |       | 10,038                             |       | 70,009                               |       | 25,246 |   | 102,485 |   |
| Expense                                     |       | (1,651,127                         | )          | (857,713                             | )          | (3,139,953 | ) | (1,903,278 | ) |
| Net interest  expense                       |       | (1,641,089                         | )          | (787,704                             | )          | (3,114,707 | ) | (1,800,793 | ) |
|                                        |       |                               |       |                                 |       |   |   |   |   |
| Net loss                                    |       | $                                  | (3,253,367 | )                                    | $          | (1,443,873 | ) | $ | (7,560,069 | ) | $ | (2,843,347 | ) |
|                                        |       |                               |       |                                 |       |   |   |   |   |
| Loss per common  share, basic               |       | $                                  | (0.20      | )                                    | $          | (0.09 | ) | $ | (0.47 | ) | $ | (0.19 | ) |
|                                        |       |                               |       |                                 |       |   |   |   |   |
| Weighted average  shares outstanding, basic |       | 16,197,849                         |       | 16,004,680                           |       | 16,190,066 |   | 14,975,124 |   |

 

See notes to condensedconsolidated financial statements.

 

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**GRANITE CITY FOOD & BREWERY LTD.**

# **CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Twenty-six Weeks Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **June 24,**                    | ** ** | **June 26,** | ** ** |
| ** **                                                                         | ** ** | **2008**                             | ** ** | **2007** | ** ** |
|                                                                               |       |                                 |       |   |   |
| Cash flows from operating  activities:                                             |       |                                 |       |   |   |
| Net loss                                                                           |       | $                                    | (7,560,069 | ) | $ | (2,843,347 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:       |       |                                 |       |   |   |
| Depreciation and  amortization                                                     |       | 3,151,514                            |       | 2,224,724 |   |
| Other  amortization                                                                |       | 23,543                               |       | 18,004 |   |
| Stock option  compensation expense                                                 |       | 263,912                              |       | 466,459 |   |
| Loss on disposal  of property and equipment                                        |       | 51,371                               |       | 79,126 |   |
| Deferred rent                                                                      |       | 281,954                              |       | 264,022 |   |
| Changes in  operating assets and liabilities:                                      |       |                                 |       |   |   |
| Inventory                                                                          |       | (21,137                              | )          | 25,892 |   |
| Prepaids and  other                                                                |       | 62,068                               |       | (8,276 | ) |
| Accounts payable                                                                   |       | (69,927                              | )          | 209,092 |   |
| Accrued expenses                                                                   |       | 50,353                               |       | (712,226 | ) |
| Net cash used in  operating activities                                             |       | (3,766,418                           | )          | (276,530 | ) |
|                                                                               |       |                                 |       |   |   |
| Cash flows from  investing activities:                                             |       |                                 |       |   |   |
| Purchase of:                                                                       |       |                                 |       |   |   |
| Property and  equipment                                                            |       | (2,419,971                           | )          | (2,289,499 | ) |
| Intangible and  other assets                                                       |       | (229,268                             | )          | (3,617 | ) |
| Net cash used in  investing activities                                             |       | (2,649,239                           | )          | (2,293,116 | ) |
|                                                                               |       |                                 |       |   |   |
| Cash flows from  financing activities:                                             |       |                                 |       |   |   |
| Payments on  capital lease obligations                                             |       | (793,469                             | )          | (6,522,478 | ) |
| Proceeds from  capital leases                                                      |       | 4,000,000                            |       | — |   |
| Payments on long  term-debt                                                        |       | (135,636                             | )          | (120,529 | ) |
| Net proceeds  from issuance of stock                                               |       | 34,486                               |       | 12,788,108 |   |
| Net cash  provided by financing activities                                         |       | 3,105,381                            |       | 6,145,101 |   |
|                                                                               |       |                                 |       |   |   |
| Net (decrease)  increase in cash                                                   |       | (3,310,276                           | )          | 3,575,455 |   |
| Cash and cash  equivalents, beginning                                              |       | 7,076,835                            |       | 7,671,750 |   |
| Cash and cash  equivalents, ending                                                 |       | $                                    | 3,766,559  |   | $ | 11,247,205 |   |
|                                                                               |       |                                 |       |   |   |
| Supplemental  disclosure of non-cash investing and financing activities:           |       |                                 |       |   |   |
| Land, buildings  and equipment acquired under capital lease agreements             |       | $                                    | 5,759,548  |   | $ | — |   |
| Property and  equipment and intangibles purchased and included in accounts payable |       | $                                    | 1,200,772  |   | $ | 1,288,078 |   |

 

See notes to condensed consolidated financialstatements.

 

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**GRANITE CITY FOOD & BREWERY LTD.**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

Thirteen and Twenty-six weeks ended June 24, 2008and June 26, 2007

 

**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 first Granite City restaurant opened inSt. Cloud, Minnesota in July 1999 and the Company subsequently expanded toother Midwest markets, opening its 26th restaurant on July 29,2008.  The Company also operates a 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.  In2007, the Company was granted a patent by the United States Patent Office forits brewing process.

 

TheCompany’s expansion strategy focuses on development of restaurants in marketswhere management believes the Company’s concept will have broad appeal andattractive restaurant-level economics.

 

Principlesof consolidation and presentation

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America and regulations of the Securities and ExchangeCommission.  Accordingly, they do notinclude all the information and footnotes required by U.S. generally acceptedaccounting principles for complete financial statements.  These statements include the accounts andoperations of the Company and its subsidiary corporations under which itsKansas locations are operated.  Fifty-onepercent of the stock of each of the subsidiary corporations is owned by a residentof Kansas and the Company owns the remainder of the stock of each subsidiarycorporation.  Each resident-owner of thestock of these entities has entered into a buy-sell agreement with eachcorporation providing, among other things, that transfer of the shares isrestricted and that the shareholder must sell his shares to the corporationupon certain events, including termination of employment (if employed by theCompany) or any event that disqualifies the resident-owner from owning theshares under applicable laws and regulations of the state.  The Company has entered into a masteragreement with each separate subsidiary corporation that permits the operationof the restaurants and leases to each corporation the Company’s property andfacilities.  Each corporation pays all ofits operating expenses and obligations, and the Company retains, asconsideration for the operating arrangements and the lease of property andfacilities, all the net profits, as defined, if any, from its operations.  The Company has determined that the foregoingownership structure will cause these separate corporations to be treated asvariable interest entities in which the Company has a controlling financialinterest for the purpose of Financial Accounting Standards Board (FASB)Interpretation 46(R), *Consolidation of VariableInterest Entities. *As such,the corporations are consolidated with the Company’s financial statements andthe Company’s financial statements do not reflect a minority ownership in thoseseparate corporations.  Also included inthe Company’s consolidated financial statements are other wholly-ownedsubsidiaries.  All references to theCompany in these notes to the condensed consolidated financial statementsrelate to the consolidated entity.

 

Inthe opinion of management, all adjustments, consisting of normal recurringadjustments, which are necessary for a fair statement of its financial positionas of June 24, 2008 and the results of operations for the interim periodsended June 24, 2008 and June 26, 2007 have been included.

 

The balance sheet at December 25, 2007, 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 for 

 

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complete 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 25, 2007, filed with the Securities andExchange Commission on March 10, 2008.

 

The results ofoperations for the thirteen and twenty-six weeks ended June 24,2008 are notnecessarily indicative of the results to be expected for the entire year.

 

Use of estimates

 

The preparation of financial statements in conformity with generallyaccepted accounting principles in the United States of America and regulationsof the Securities and Exchange Commission requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expense during the reportingperiod.  Significant estimates includeestimates related to asset lives, lease accounting and revenuerecognition.  Actual results could differfrom these estimates.

 

Reclassifications

 

Certain minor reclassifications have been made to the financialstatements for the second quarter and first half of 2007 in order for them toconform to the presentation of the financial statements for the second quarterand first half of 2008.  Thesereclassifications have no effect on the accumulated deficit or net losspreviously reported.

 

Revenue recognition

 

Revenue is derived from the sale of prepared food and beverage andselect retail items.  Revenue isrecognized at the time of sale and is reported on the Company’s statement ofoperations net of sales taxes collected. Revenue derived from gift card sales is recognized at the time the giftcard is redeemed. Until the redemption of gift cards occurs, the outstandingbalances on such cards are included in accrued expenses in the accompanyingconsolidated balance sheets.  The Companyperiodically recognizes gift card breakage which represents the portion of itsgift card obligation for which management believes the likelihood of redemptionby the customer is remote, based upon historical redemption patterns.

 

Cash and cash equivalents

 

The Company considers all highly liquid instruments with originalmaturities of three months or less to be cash equivalents.  The Company maintains its cash at financialinstitutions in Minnesota, South Dakota, Kansas, Ohio and Indiana.  At times, the bank balances exceed limitsinsured by federal agencies.

 

Stock-based compensation

 

The Company records stock-based compensation in accordance with theprovisions of Financial Accounting Standards Board (FASB) Statement ofFinancial Accounting Standard (SFAS) No. 123 (revised 2004) (“SFAS 123R”),*Share-Based Payment*, and SECStaff Accounting Bulletin No. 107, *Share-BasedPayment*, requiring the measurement and recognition of allshare-based compensation under the fair value method.

 

The fair value of options at date of grant was estimated using theBlack-Scholes option-pricing model with the following assumptions for the firsthalf of 2008 and 2007:

 

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| ** **                                | ** ** | **Twenty-six Weeks Ended** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|
| ** **                                | ** ** | **June 24,**                    | ** ** | **June 26,** | ** ** |
| ** **                                | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| Weighted average  risk-free interest rate |       | 3.88% - 4.25%                        |       | 4.68% - 5.00% |   |
| Expected life of  options                 |       | 10 years                             |       | 5 - 10 years |   |
| Expected stock  volatility                |       | 40.53% - 44.27%                      |       | 37.74% - 40.10% |   |
| Expected  dividend yield                  |       | None                                 |       | None |   |

 

Earnings (loss) per share

 

Basicnet income (loss) per share is computed based on the weighted average number ofshares of common stock outstanding during the interim period.  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 thirteen and twenty-six weeks ended June 24, 2008 andJune 26, 2007 are set forth in the following table:

 
| ** **                                  | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                                  | ** ** | **June 24, 2008**        | ** ** | **June 26, 2007**          | ** ** | **June 24, 2008** | ** ** | **June 26, 2007** | ** ** |
|                                        |       |                               |       |                                 |       |   |   |   |   |
| Net loss                                    |       | $                                  | (3,253,367 | )                                    | $          | (1,443,873 | ) | $ | (7,560,069 | ) | $ | (2,843,347 | ) |
| Loss per common  share, basic               |       | $                                  | (0.20      | )                                    | $          | (0.09 | ) | $ | (0.47 | ) | $ | (0.19 | ) |
| Weighted average  shares outstanding, basic |       | 16,197,849                         |       | 16,004,680                           |       | 16,190,066 |   | 14,975,124 |   |

 

Recentaccounting pronouncements

 

InApril 2008, the Financial Accounting Standards Board (“FASB”) issued FSPFAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factorsthat should be considered in developing renewal or extension assumptions usedto determine the useful life of a recognized intangible asset under Statementof Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and OtherIntangible Assets” (“SFAS 142”).  This change isintended to improve the consistency between the useful life of a recognizedintangible asset under SFAS 142 and the period of expected cash flows used tomeasure the fair value of the asset under SFAS 141R and other GAAP.  The requirementfor determining useful lives must be applied prospectively to intangible assetsacquired after the effective date and the disclosure requirements must beapplied prospectively to all intangible assets recognized as of, and subsequentto, the effective date.  FSP 142-3 is effective forfinancial statements issued for fiscal years beginning after December 15,2008.  The Company is currentlyevaluating the impact of adopting FSP 142-3 on its consolidated financialstatements.

 

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS 157”),which defines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements.  SFAS No. 157 became effective forfinancial statements issued for the Company’s fiscal year 2008, subject to aone-year delay for nonfinancial assets. In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities—Including an amendment of FASB Statement No. 115*(“SFAS 159”),which will permit the option of choosing to measure certain eligible items atfair value at specified election dates and report unrealized gains and lossesin earnings, providing SFAS 157 is also adopted.  The adoption of SFAS 157 andSFAS 159 has not had, nor does management expect it to have, a materialimpact on the Company’s consolidated financial statements.

 

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**2.****             ****Fairvalue of financial instruments**

 

At June 24, 2008 and December 25, 2007, the fair value ofcash and accounts payable approximate their carrying value due to theshort-term nature of the instruments. The fair value of the capital lease obligations and long-term debt isestimated at its carrying value based upon current rates available to theCompany.

 

**3.****             ****Non-currentassets**

 

Property and equipment

 

Property and equipment are recorded at cost and depreciated over theestimated useful lives of the related assets. The cost of leasehold improvements is depreciated over the initial termof the related lease.  Depreciation iscomputed on the straight-line method for financial reporting purposes andaccelerated methods for income tax purposes. Amortization of assets acquired under capital lease is included indepreciation expense.  The following is asummary of the Company’s property and equipment at June 24, 2008 and December 25,2007:

 
| ** **                     | ** ** | **June 24, 2008** | ** ** | **December 25, 2007** | ** ** |
|--------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Land                           |       | $                           | 18,000     |                            | $          | 18,000 |   |
| Buildings                      |       | 53,500,969                  |       | 46,238,741                      |       |
| Leasehold  improvements        |       | 8,995,992                   |       | 8,516,291                       |       |
| Equipment and  furniture       |       | 30,531,323                  |       | 26,133,376                      |       |
| Construction in  progress*     |       | 421,720                     |       | 5,540,980                       |       |
|                           |       | 93,468,004                  |       | 86,447,388                      |       |
| Less accumulated  depreciation |       | (17,121,628                 | )          | (14,036,502                     | )          |
|                           |       | $                           | 76,346,376 |                            | $          | 72,410,886 |   |

 

----

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

 
| ** **                                   | ** ** | **June 24, 2008** | ** ** | **December 25, 2007** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Leasehold  Improvements for future locations |       | $                           | 223,500    |                            | $          | 240,000 |   |
| Building and  equipment at future locations  |       | $                           | 198,000    |                            | $          | 5,300,000 |   |

 

Intangible and other assets

 

Intangible and other assets consisted of the following:

 
| ** **                     | ** ** | **June 24, 2008** | ** ** | **December 25, 2007** | ** ** |
|--------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Intangible  assets:            |       |                        |       |                            |       |
| Liquor licenses                |       | $                           | 331,415    |                            | $          | 331,415 |   |
| Trademarks                     |       | 139,021                     |       | 137,601                         |       |
| Other assets:                  |       |                        |       |                            |       |
| Capitalized loan  costs        |       | 224,968                     |       | 199,912                         |       |
| Security  deposits             |       | 534,245                     |       | 524,903                         |       |
|                           |       | 1,229,649                   |       | 1,193,831                       |       |
| Less accumulated  amortization |       | (155,683                    | )          | (132,140                        | )          |
|                           |       | $                           | 1,073,966  |                            | $          | 1,061,691 |   |

 

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**4.        Accrued expenses**

 

Accrued expenses consisted of the following:

 
| ** **                        | ** ** | **June 24, 2008** | ** ** | **December 25, 2007** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Payroll related                   |       | $                           | 2,859,899  |                            | $          | 2,472,513 |   |
| Deferred revenue  from gift cards |       | 1,227,774                   |       | 2,103,294                       |       |
| Sales taxes                       |       | 866,832                     |       | 692,758                         |       |
| Interest                          |       | 471,487                     |       | 399,387                         |       |
| Real estate taxes                 |       | 412,971                     |       | 212,950                         |       |
| Insurance                         |       | 22,458                      |       | —                          |       |
| Other                             |       | 662,825                     |       | 592,992                         |       |
|                              |       | $                           | 6,524,246  |                            | $          | 6,473,894 |   |

 

**5.        Deferred rent payable**

 

The Company leases most of its restaurant properties.  Leases are accounted for under the provisionsof SFAS No. 13 and SFAS No. 98, *Accountingfor Leases,* as well as other subsequent amendments and authoritativeliterature including FASB Staff Position No. FAS 13-1, *Accounting for Rental Costs Incurred During aConstruction Period.*  Forleases that contain rent escalation clauses, the Company records the total rentpayable during the lease term and recognizes expense on a straight-line basisover the initial lease term, including the “build-out” or “rent-holiday” periodwhere no rent payments are typically due under the terms of the lease.  Any difference between minimum rent andstraight-line rent is recorded as deferred rent payable.  Additionally, pursuant to Emerging IssuesTask Force No. 98-09, *Accounting forContingent Rent*, contingent rent expense based on a percentage ofrevenue is accrued and recorded to the extent it is expected to exceed minimumbase rent per the lease agreement, based on estimates of probable levels ofrevenue during the contingency period. Deferred rent payable also includes a tenant improvement allowance theCompany received, which is being amortized as a reduction of rent expense on astraight-line basis over the initial term of the lease.

 

Deferred rent payable

 
| ** **                                              | ** ** | **June 24, 2008** | ** ** | **December 25, 2007** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Difference  between minimum rent and straight-line rent |       | $                           | 2,254,337  |                            | $          | 1,961,283 |   |
| Contingent rent  expected to exceed minimum rent        |       | 68,713                      |       | 64,813                          |       |
| Tenant  improvement allowance                           |       | 343,889                     |       | 358,889                         |       |
|                                                    |       | $                           | 2,666,939  |                            | $          | 2,384,985 |   |

 

**6.  Long-term debt**

 

As of June 24, 2008, the Company had two outstanding long-termloans with an independent financial institution the proceeds of which it usedto purchase equipment for its restaurants in Des Moines and Davenport, IA.  These loans are secured only by the personalproperty and fixtures at the respective locations.  In addition to these two loan agreements, theCompany has a long-term loan outstanding with the same independent financialinstitution secured by the tangible personal property and fixtures at theFargo, ND restaurant.  Such loan isguaranteed by Steven J. Wagenheim, the Company’s president, chief executiveofficer and one of its directors.  As of June 24,2008 and December 25, 2007, the balances, interest rates and maturitydates of these loans were:

 

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| ** **            | ** ** | **June 24, 2008** | ** ** | **December 25, 2007** | ** ** |
|-----------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Des Moines            |       |                        |       |                            |       |
| Loan balance          |       | $                           | 287,566    |                            | $          | 345,295 |   |
| Annual interest  rate |       | 10.25                       | %          | 10.25                           | %          |
| Maturity date         |       | August 27, 2010        |       | August 27, 2010            |       |
| Davenport             |       |                        |       |                            |       |
| Loan balance          |       | $                           | 329,130    |                            | $          | 383,330 |   |
| Annual interest  rate |       | 10.25                       | %          | 10.25                           | %          |
| Maturity date         |       | January 6, 2011        |       | January 6, 2011            |       |
| Fargo                 |       |                        |       |                            |       |
| Loan balance          |       | $                           | 1,264,704  |                            | $          | 1,288,411 |   |
| Annual interest  rate |       | 8.75                        | %          | 8.75                            | %          |
| Maturity date         |       | August 15, 2011        |       | August 15, 2011            |       |

 

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

 
| ** **            | ** ** | **Long-term** | ** ** |
|-----------------------|------------|---------------|------------|
| **Year ending:** | ** ** | **Debt**      | ** ** |
| 2008                  |       | $             | 143,776    |   |
| 2009                  |       | 309,913       |       |
| 2010                  |       | 291,424       |       |
| 2011                  |       | 1,136,287     |       |
|                  |       | $             | 1,881,400  |   |

 

**7.        Capital leases**

 

Asof June 24, 2008, the Company operated 23 restaurants under capital leaseagreements, 21 of which originated with Dunham Capital Management, L.L.C. (“Dunham”),a commercial developer.  The land portionof these leases is classified as an operating lease while the building portionof these leases is classified as a capital lease because its present value wasgreater than 90% of the estimated fair value at the beginning of the leaseand/or the lease term represents 75% or more of the expected life of theproperty.  The Company also has a landand building lease agreement for its beer production facility.  This ten-year lease allows the Company to purchasethe facility at any time for $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.

 

Asof June 24, 2008, the Company had entered into three capital leaseagreements related to restaurants which commenced or will commence operationssubsequent to the end of the second quarter 2008.  Each of these leases originated with Dunham.  The land portion of these leases will beclassified as an operating lease while the building portion of these leaseswill be classified as a capital lease (see Note 8).

 

Asof June 24, 2008, the Company had capital lease agreements that it used tofinance the equipment at 12 of its restaurants. During the second quarter of 2008, the Company financed the equipment atfour of those restaurants, aggregating approximately $4.0 million under theterms and conditions of the Equipment Lease Commitment the Company entered intowith DHW Leasing, L.L.C. (“DHW”) in December 2007.  Subsequent to June 24, 2008, the Companyentered into additional capital lease agreements for equipment at two of itsrestaurants, aggregating approximately $2.0 million (see Note 12).  These leases are classified as capital leasesas a bargain purchase option exists on each lease.

 

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Includedin property and equipment are the following assets held under capital leases:

 
| ** **                            | ** ** | **June 24, 2008** | ** ** | **December 25, 2007** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Land                                  |       | $                           | 18,000     |                            | $          | 18,000 |   |
| Building                              |       | 50,988,741                  |       | 33,851,945                      |       |
| Equipment and  leasehold improvements |       | 11,482,537                  |       | 7,807,724                       |       |
|                                  |       | 62,489,278                  |       | 41,677,669                      |       |
| Less accumulated  depreciation        |       | (7,817,211                  | )          | (3,718,654                      | )          |
|                                  |       | $                           | 54,672,067 |                            | $          | 37,959,015 |   |

 

Minimum futurelease payments under all capital leases as of June 24, 2008 are:

 
| **Year ending:**                        | ** ** | **Capital Leases** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|
| 2008                                         |       | $                       | 1,824,173  |   |
| 2009                                         |       | 3,946,777               |       |
| 2010                                         |       | 3,963,987               |       |
| 2011                                         |       | 3,970,065               |       |
| 2012                                         |       | 3,921,119               |       |
| Thereafter                                   |       | 56,754,394              |       |
| Total minimum  lease payments                |       | 74,380,515              |       |
| Less amount  representing interest           |       | 15,219,187              |       |
| Present value of  net minimum lease payments |       | 59,161,328              |       |
| Less current portion                         |       | 1,774,633               |       |
| Long-term  portion of obligations            |       | $                       | 57,386,695 |   |

 

The foregoingtable considers additional lease commitments commencing after June 24,2008.  Amortization expense related tothe assets held under capital leases is included with depreciation expense onthe Company’s statements of operations.

 

**8.        Commitments andcontingencies**

 

TheCompany will need to expend additional capital in connection with its long-termexpansion plans.  Based on the Company’s June 24, 2008 cash position of $3.8 million,and the December 2007 $16.0 million DHW Equipment LeaseCommitment, of which approximately $8.0 million lease financing remainedavailable as of June 24, 2008, as well as expected cash flows fromoperations, management believes that the Company will have sufficient funds tocomplete currently-planned restaurant openings through 2009 and maintainsufficient working capital for operations. However, the Company may require further funding to open additionalrestaurants depending upon the number of planned openings, cost of capital,availability of developer financing or landlord tenant improvement funding,adverse sales trends, and the Company’s ability to generate positive cashflow.  If sources of liquidity areinsufficient to fund expected capital needs, or the Company’s needs are greaterthan anticipated, the Company will be required to raise additional funds in thefuture through the incurrence of indebtedness or public or private sales ofequity securities.

 

SouthBend and Indianapolis, Indiana and Troy, Michigan lease agreements

 

In March, April and May 2008, the Company entered into20-year net lease agreements relating to restaurants it opened or anticipatesopening subsequent to the end of the second quarter of fiscal year 2008 inSouth Bend and Indianapolis, Indiana and Troy, Michigan, respectively, underthe terms specified in the development agreement with Dunham for thedevelopment of restaurants.  Therestaurants were constructed or will be constructed for the Company on abuild-to-suit basis.  Basic terms of theleases include annual rent equal to 

 

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10.5% of the construction cost plus the land lease and contingent rentbased on a percentage of revenue.  Thebase rent will escalate 10% at the end of each five-year period.  The term of each lease commenced or willcommence when operations begin and the Company will be responsible for anyreal-estate taxes and all operating costs. Rental costs associated with the operating lease incurred during theconstruction period are recognized as pre-opening costs and escalated rent willbe recognized as expense on a straight-line basis over the term of each lease.

 

Development agreement with United Properties Investment LLC (“UnitedProperties”)

 

In April 2008, the Company entered into a development agreement withUnited Properties for the development of up to 22 restaurants to be builtbetween 2009 and 2012.  As the Company’snew developer, United Properties will be responsible for all costs related tothe land and building of each restaurant. The annual lease rate for fee-simple land and building developments willbe 9.5% and the Company will have the right of first offer to purchase theserestaurants.  Additionally, in the eventUnited Properties sells one of the buildings that it develops for the Companyat an amount in excess of the threshold agreed to by the parties in theagreement, then the Company will share in the profits of that sale.  The Company assumes no liability in the eventUnited Properties sells a building at a loss. The Company isnot bound to authorize the construction of restaurants during that time period,but generally cannot use another developer to develop or own a restaurant aslong as the development agreement is in effect. The Company can, however, use another developer if United Propertiesdeclines to build a particular restaurant.

 

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 at this time, that the expectedoutcome of these matters, individually or in the aggregate, will not have amaterial adverse effect on the results of operation, liquidity or financialcondition of the Company.

 

**9.****             ****Commonstock**

 

Exercise of warrants and options

 

On December 31, 2007, a director of the Company exercised a stockoption for the purchase of 15,000 shares of common stock at an exercise priceof $2.27 per share.  These options wereissued pursuant to the 1997 Director Stock Option Plan and had an expirationdate of January 1, 2008.

 

On January 31, 2008, the Company issued 10,153 shares of commonstock upon the cashless exercise of a warrant for the purchase of 23,996 sharesof common stock originally issued March 20, 2003 to one of the agents forits private placement of Series A Convertible Preferred Stock andwarrants.  The foregoing warrant had anexercise price of $1.58 per share and an expiration date of March 20,2008.

 

On March 5, 2008, the Company issued 7,070 shares of common stockupon the cashless exercise of a warrant for the purchase of 23,996 shares ofcommon stock originally issued March 20, 2003 to one of the agents for itsprivate placement of Series A Convertible Preferred Stock andwarrants.  The foregoing warrant had anexercise price of $1.58 per share and an expiration date of March 20,2008.

 

On March 7, 2008, the Company issued 6,681 shares of common stockupon the cashless exercise of a warrant for the purchase of 25,842 shares ofcommon stock originally issued March 20, 2003 to one of the agents for itsprivate placement of Series A Convertible Preferred Stock and warrants.  The foregoing warrant had an exercise priceof $1.58 per share and an expiration date of March 20, 2008.

 

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**10.****      ****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 June 24, 2008,options to purchase 306,500 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 June 24,2008, options to purchase 300,000 shares of common stock were outstanding underthe 1997 Director Stock Option Plan (“DSOP”), which expired July 29,2007.  Under this plan, the Companyautomatically granted an option to each outside director on the date suchperson became a director for the purchase of 15,000 shares of common stock andthereafter on each successive anniversary of the grant ofthe first option for the purchase of 15,000 shares.  On May 2, 2007, the Company’s board ofdirectors agreed that until the adoption of any future equity plan fornon-employee directors, awards of stock options for the purchase of 15,000shares of common stock per year should continue to be made to each non-employeedirector on the anniversary of his election to the Board under the 2002 EquityIncentive Plan.  The board further resolved that such awards are to havethe same terms and conditions as those made under the DSOP; provided, however,that they are to be exercisable for a period of ten years rather than fiveyears.

 

In August 2002,the Company adopted the 2002 Equity Incentive Plan for employees, prospectiveemployees, officers and members of the Company’s board of directors, as well asconsultants and advisors to the Company, to purchase shares of the Company’scommon stock at an exercise price that equals or exceeds the fair market valueon the date of grant.  The number ofshares authorized for issuance as of June 24, 2008 was 2,649,743, of which772,743 shares remained available for future issuance and options to purchase1,801,300 shares were outstanding. Although vesting schedules may vary, option grants under this plan generallyvest evenly over a three or four-year period and options are exercisable for nomore than ten years from the date of grant.

 

A summary of the status of the Company’s stock options as of June 24, 2008 is presentedbelow:

 
| ** **                                                  | ** ** | ** ** | ** ** | ** **              | ** ** | **Weighted**              | ** ** | ** **    | ** ** |
|-------------------------------------------------------------|------------|------------|------------|-------------------------|------------|---------------------------|------------|---------------|------------|
| ** **                                                  | ** ** | ** ** | ** ** | **Weighted**            | ** ** | **Average**               | ** ** | **Aggregate** | ** ** |
| ** **                                                  | ** ** | ** ** | ** ** | **Average**             | ** ** | **Remaining**             | ** ** | **Intrinsic** | ** ** |
| **Fixed Options**                                      | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** | **Contractual Life** | ** ** | **Value**     | ** ** |
| Outstanding at  December 26, 2006                      |       | 1,595,000  |       | $                       | 3.70       |                      | 6.1 years  |          |       |   |
| Granted                                                     |       | 824,000    |       | $                       | 4.82       |                      | 7.3 years  |          |       |   |
| Exercised                                                   |       | (36,200    | )          | $                       | 1.52       |                      |       |          |       |   |
| Forfeited                                                   |       | (110,000   | )          | $                       | 4.63       |                      |       |          |       |   |
| Outstanding at  December 25, 2007                      |       | 2,272,800  |       | $                       | 4.10       |                      | 6.7 years  |          |       |   |
|                                                        |       |       |       |                    |       |                      |       |          |       |
| Granted                                                     |       | 370,000    |       | $                       | 2.16       |                      | 9.9 years  |          |       |   |
| Exercised                                                   |       | (15,000    | )          | $                       | 2.27       |                      | —     |          |       |   |
| Forfeited                                                   |       | (175,000   | )          | $                       | 4.24       |                      | —     |          |       |   |
| Outstanding at  June 24, 2008                          |       | 2,452,800  |       | $                       | 3.80       |                      | 6.0 years  |          | $          | 38,265 |   |
|                                                        |       |       |       |                    |       |                      |       |          |       |
| Options  exercisable at December 25, 2007              |       | 1,507,304  |       | $                       | 3.71       |                      | 5.7 years  |          |       |   |
| Options  exercisable at June 24, 2008                  |       | 1,505,802  |       | $                       | 3.84       |                      | 4.7 years  |          | $          | 37,665 |   |
|                                                        |       |       |       |                    |       |                      |       |          |       |
| Weighted-average  fair value of options granted during 2008 |       | $          | 1.30       |                    |       |                      |       |          |       |   |
|                                                             |            |            |            |                         |            |                           |            |               |            |  |  |  |

 

The aggregate intrinsic value in the table above represents the totalpretax intrinsic value (the difference between the closing price of the Company’sstock on June 24,2008 and the exercise price, multiplied by the number of in-the-moneyoptions) that would have been received by the option holders had all option 

 

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holders exercised their options on June 24, 2008.  As of June 24, 2008, there was approximately$874,435 of total unrecognized compensation cost related to unvestedshare-based compensation arrangements, of which $286,142 is expected to berecognized during the remainder of fiscal year 2008, $395,093 in fiscal year2009, $125,675 in fiscal year 2010, $53,944 in fiscal year 2011 and $13,581 infiscal year 2012.

 

The following table summarizes information about stock optionsoutstanding at June 24, 2008:

 
| ** **               | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|--------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **Number of**           | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | **Number of** | ** ** | ** ** | ** ** |
| ** **               | ** ** | **Options**                  | ** ** | **Average**                  | ** ** | **Weighted** | ** ** | **Options** | ** ** | **Weighted** | ** ** |
| **Range of**        | ** ** | **Outstanding**              | ** ** | **Remaining**                | ** ** | **Average** | ** ** | **Exercisable** | ** ** | **Average** | ** ** |
| **Exercise Prices** | ** ** | **6/24/2008**                | ** ** | **Contractual Life**    | ** ** | **Exercise Price** | ** ** | **6/24/2008** | ** ** | **Exercise Price** | ** ** |
|                     |       |                         |       |                         |       |   |   |   |   |   |   |
| $1.00 - $2.00            |       | 161,500                      |       | 5.1 years                    |       | $ | 1.73 |   | 121,500 |   | $ | 1.65 |   |
| $2.01 - $3.00            |       | 516,000                      |       | 7.9 years                    |       | $ | 2.28 |   | 165,000 |   | $ | 2.42 |   |
| $3.01 - $4.00            |       | 703,000                      |       | 4.9 years                    |       | $ | 3.77 |   | 587,001 |   | $ | 3.81 |   |
| $4.01 - $5.00            |       | 607,300                      |       | 6.4 years                    |       | $ | 4.37 |   | 492,300 |   | $ | 4.40 |   |
| $5.01 - $6.00            |       | 315,000                      |       | 3.7 years                    |       | $ | 5.21 |   | 90,000 |   | $ | 5.27 |   |
| $6.01 - $7.00            |       | 150,000                      |       | 8.8 years                    |       | $ | 6.20 |   | 50,001 |   | $ | 6.20 |   |
| Total                    |       | 2,452,800                    |       | 6.0 years                    |       | $ | 3.80 |   | 1,505,802 |   | $ | 3.84 |   |

 

**11.  Common stock warrants**

 

In November 2002, the Company completed a private placement of Series AConvertible Preferred Stock and warrants to purchase common stock.  As part of the agreement between the Companyand its private placement agents, the agents received five-year warrants topurchase an aggregate of 288,604 shares of common stock at an exercise price of$1.58 per share. During the first quarter of fiscal year 2008, the Companyissued an aggregate of 23,904 shares of common stock upon the cashless exerciseof such warrants for the purchase of an aggregate of 73,834 shares of commonstock.  No such agent warrants relatingto this private placement remain outstanding.

 

In May 2003, the Company entered into a two-year financialadvisory services agreement. As part of the agreement between the Company andthe financial consultant, the consultant received five-year warrants topurchase an aggregate of 35,000 shares of common stock at exercise pricesranging from $2.85 to $5.40 per share. On May 12, 2008, all such warrants expired unexercised.

 

In September 2004, the Company entered into a securities purchaseagreement with certain accredited investors for the sale of approximately $8.5million of common stock and warrants. Under this agreement, the Company issued five-year warrants for thepurchase of 1,045,844 shares of common stock at an exercise price of $5.00 pershare.  The Company may call for themandatory exercise of such warrants if certain conditions are met.  As part of this private placement, theCompany sold to its placement agents, for $100, five-year warrants to purchasean aggregate of 130,730 shares of common stock at an exercise price of $5.00per share.  As of June 24, 2008, none of suchwarrants had been exercised.

 

In October 2005, the Company entered into a securities purchaseagreement with certain accredited investors for the sale of approximately $5.34million of common stock and warrants. Under this agreement, the Company issued five-year warrants for thepurchase of 221,762 shares of common stock at an exercise price of $6.50 pershare to such investors and five-year warrants for the purchase of 55,436shares of common stock at an exercise price of $6.50 to the Company’s placementagent. As of June 24,2008, none of such warrants had been exercised.

 

During the first half of fiscal year 2008, no warrants were issued,warrants for the purchase of an aggregate of 73,835 shares were exercised andwarrants for the purchase of an aggregate of 35,000 shares were forfeited.  As 

 

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of June 24,2008, warrants for the purchase of an aggregate of 1,453,772 shares ofcommon stock were outstanding and exercisable. The weighted average exercise price of such warrants was $5.29 pershare.

 

**12.  Subsequent Events**

 

In July 2008, DHW purchased and leased to the Company equipment attwo of its restaurants under the terms and conditions of the Equipment LeaseCommitment the Company entered into with DHW in December 2007.  The value of the equipment financed at eachrestaurant is approximately $1.0 million. The annual interest rate on one five-year lease is 10.55%.  The Company will pay 10.3% annual interest onthe other lease for 12 months, at which time the interest rate will be lockedin at the then 5-year Treasury bill rate plus 8.3%.  The Company has the option to purchase the leasedequipment for $1.00 upon payment in full of all rent payments due under eachlease.  While Mr. Wagenheim owns a20% membership interest in DHW and has agreed to personally guarantee 20% ofDHW’s indebtedness to its lenders, he will not receive a guarantee fee or otherpayment in connection with this DHW financing.

 

**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 10, 2008, foradditional factors known to us that may cause actual results to vary.*

 

**Overview**

 

We are a Modern Americanupscale casual restaurant chain. As of July 29, 2008, we operated 26restaurants in 12 Midwestern states, substantially all of which featureon-premises breweries and operate under the name of Granite City Food &Brewery®.  We believe our menu featureshigh quality yet affordable family favorite menu items prepared frommade-from-scratch recipes and served in generous portions.  We believe that the sophisticated yetunpretentious restaurants, proprietary food and beverage products, attractiveprice points and high service standards combine for a great diningexperience.  The location of each restaurantand 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     |

 

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| 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 |   | Rogers, Arkansas           |   | Oct-07 |
| 21 |   | East Peoria,  Illinois     |   | Oct-07 |
| 22 |   | Orland Park,  Illinois     |   | Dec-07 |
| 23 |   | St. Louis,  Missouri       |   | Jan-08 |
| 24 |   | Ft. Wayne,  Indiana        |   | Jan-08 |
| 25 |   | Toledo, Ohio               |   | Feb-08 |
| 26 |   | South Bend,  Indiana       |   | Jul-08 |

 

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 production createsconsistency of taste for our product from unit to unit.  The initial product produced at our beerproduction facility is transported by truck to the fermentation vessels at eachof our restaurants where the brewing process is completed. In 2007, we weregranted a patent by the United States Patent Office for this brewingprocess.  We believe that our currentbeer production facility, which opened in June 2005, has the capacity toservice up to 35 restaurant locations.

 

We operate Granite City University, where ourmanagers are trained under the instruction of full-time, dedicatedtrainers.  Our seven to fourteen-weektraining program consists of both “hands on” as well as classroom training forall aspects of management.  All salariesof our managers in training and our trainers as well as all related costsincurred at Granite City University are recorded as a component of our generaland administrative costs.

 

We utilize a new store opening team whichconsists of experienced restaurant managers who are dedicated to the opening ofour new restaurants.  This team generallyarrives at a new restaurant site two to three months in advance of therestaurant opening date and coordinates all staffing and training matters forthat new restaurant.  However, due toopening six restaurants in a period of approximately 120 days in the lastquarter of 2007 and first quarter of 2008, the team was not able to train ateach location for our typical two to three-month time period in connection withour most recent openings.  We believethat a dedicated team delivers a more disciplined opening process and ensuresadherence to our company’s exacting standards and culture.  In the third quarter of 2008, we initiated agreater involvement of our district operators in our store openings to enhancethe opening process and provide more consistency of training.  Additionally, we are committed to balancestore opening schedules in the future to avoid clustering of store openings ina short period of time.

 

We have developed our restaurants usingproceeds from the sale of our securities, building and equipment financing andcash flow from operations.  We builtunits 4-9, 11-14 and 16-26 based upon the prototype we developed in early 2003.  In 2004 and 2005, we retrofitted units 1-3 toconform to this prototype model. In 2005 and 2006, we developed units 10 and15, respectively, which were conversions of existing restaurants.  With the exception of units 1-3 and 15, wedeveloped all of our units under our multi-site development agreement withDunham Capital Management, L.L.C. (“Dunham”), a commercial developer thatprovides us with construction management and financing for newrestaurants.  Under the developmentagreement, we lease the land and building of each restaurant developed by Dunham.

 

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In April 2008, we enteredinto a development agreement with United Properties Investment LLC (“United Properties”)for the development of up to 22 restaurants to be built between 2009 and2012.  As our new developer, 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 ourmanagement for the selection of restaurant sites and the development ofrestaurants on those sites and scheduling for the development and constructionof each restaurant once a location is approved. We will lease each restaurant developed under this agreement from UnitedProperties.

 

We believe that ouroperating results will fluctuate significantly because of several factors,including the timing of new restaurant openings and related expenses, profitabilityof new restaurants, changes in food and labor costs, increases or decreases incomparable restaurant sales, general economic conditions, consumer confidencein the economy, changes in consumer preferences, nutritional concerns anddiscretionary spending patterns, competitive factors, the skill and experienceof our restaurant-level management teams and weather conditions.

 

We expect the timing of newrestaurant openings to have a significant impact on restaurant revenues andcosts.  We believe we will incur the mostsignificant portion of pre-opening costs associated with a new restaurantwithin the two months immediately preceding, and the month of, the opening ofsuch restaurant.

 

Thethirteen and twenty-six weeks ended June 24, 2008 included 325 and 635restaurant weeks, respectively, which is the sum of the actual number of weekseach restaurant operated.  The thirteenand twenty-six weeks ended June 26, 2007 included 234 and 468 restaurantweeks, respectively.  The source of theadditional restaurant weeks in fiscal year 2008 is shown in the followingchart:

 
| ** **                        | ** ** | **Thirteen Weeks   Ended** | ** ** | **Twenty-six Weeks  Ended** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|
| **Location**                      | ** ** | **June 24, 2008**          | ** ** | **June 24, 2008**      | ** ** |
| Rockford, Illinois                |       | 13                                   |       | 26                               |       |
| Rogers, Arkansas                  |       | 13                                   |       | 26                               |       |
| East Peoria, Illinois             |       | 13                                   |       | 26                               |       |
| Orland Park, Illinois             |       | 13                                   |       | 26                               |       |
| St. Louis, Missouri               |       | 13                                   |       | 23                               |       |
| Ft. Wayne, Indiana                |       | 13                                   |       | 21                               |       |
| Toledo, Ohio                      |       | 13                                   |       | 19                               |       |
| Total Additional Restaurant Weeks |       | 91                                   |       | 167                              |       |

 

Becausewe continue to expand our operations and open new restaurants at various timesthroughout the year, we provide this statistical measure to enhance thecomparison of revenues from period to period as changes occur in the number ofunits we are operating.

 

Ourrestaurant revenue is comprised almost entirely of the sales of food and beverages.  The sale of retail items typically representsless than one percent of total revenue. Product costs include the costs of food, beverages and retail items.  Labor costs include direct hourly andmanagement wages, taxes and benefits for restaurant employees.  Direct and occupancy costs include restaurantsupplies, marketing costs, rent, utilities, real estate taxes, repairs andmaintenance and other related costs. Pre-opening costs consist of direct costs related to hiring and trainingthe initial restaurant workforce, the salaries and related costs of ourdedicated new store opening team, rent expense incurred during the constructionperiod and other direct costs associated with opening new restaurants.  General and administrative expenses arecomprised of expenses associated with all corporate and administrativefunctions that support existing operations, which include management and staffsalaries, employee benefits, travel, information systems, training, marketresearch, professional fees, supplies and corporate rent.  Depreciation and amortization includesdepreciation on capital expenditures at the restaurant and corporate levels andamortization 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.

 

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**Resultsof operations as a percentage of sales**

 

Thefollowing table sets forth results of our operations expressed as a percentageof sales for the thirteen and twenty-six weeks ended June 24, 2008 and June 26,2007.

 
| ** **                     | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|--------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                     | ** ** | **June 24,**                  | ** ** | **June 26,**                    | ** ** | **June 24,** | ** ** | **June 26,** | ** ** |
| ** **                     | ** ** | **2008**                           | ** ** | **2007**                             | ** ** | **2008** | ** ** | **2007** | ** ** |
|                           |       |                               |       |                                 |       |   |   |   |   |
| Restaurant  revenues           |       | 100.0                              | %          | 100.0                                | %          | 100.0 | % | 100.0 | % |
|                           |       |                               |       |                                 |       |   |   |   |   |
| Cost of sales:                 |       |                               |       |                                 |       |   |   |   |   |
| Food, beverage  and retail     |       | 30.3                               |       | 29.9                                 |       | 30.8 |   | 29.8 |   |
| Labor                          |       | 37.0                               |       | 35.5                                 |       | 38.0 |   | 35.9 |   |
| Direct  restaurant operating   |       | 14.2                               |       | 13.5                                 |       | 14.5 |   | 13.5 |   |
| Occupancy                      |       | 6.4                                |       | 6.0                                  |       | 6.4 |   | 6.2 |   |
| Total cost of  sales           |       | 87.9                               |       | 84.9                                 |       | 89.7 |   | 85.4 |   |
|                           |       |                               |       |                                 |       |   |   |   |   |
| Pre-opening                    |       | 1.0                                |       | 2.3                                  |       | 1.7 |   | 1.4 |   |
| General and  administrative    |       | 11.1                               |       | 10.3                                 |       | 11.2 |   | 9.9 |   |
| Depreciation and  amortization |       | 6.4                                |       | 6.1                                  |       | 6.5 |   | 6.1 |   |
|                           |       |                               |       |                                 |       |   |   |   |   |
| Operating loss                 |       | (6.4                               | )          | (3.6                                 | )          | (9.1 | ) | (2.8 | ) |
|                           |       |                               |       |                                 |       |   |   |   |   |
| Interest:                      |       |                               |       |                                 |       |   |   |   |   |
| Income                         |       | 0.0                                |       | 0.4                                  |       | 0.1 |   | 0.3 |   |
| Expense                        |       | (6.6                               | )          | (4.6                                 | )          | (6.4 | ) | (5.2 | ) |
| Net interest  expense          |       | (6.5                               | )          | (4.3                                 | )          | (6.3 | ) | (4.9 | ) |
|                           |       |                               |       |                                 |       |   |   |   |   |
| Net loss                       |       | (13.0                              | )%         | (7.8                                 | )%         | (15.4 | )% | (7.8 | )% |

 

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 2007Annual Report on Form 10-K filed with the Securities and ExchangeCommission on March 10, 2008.

 

**Results****of operations for the thirteen and twenty-six weeks ended June 24,2008 and June 26, 2007**

 

**Revenue**

 

We generated $25,098,838 and $18,453,954 of revenue during the second quarters of2008 and 2007, respectively.  This 36.0%increase was primarily the result of 91 additional operating weeks, which is thesum of the actual number of weeks each restaurant operated, due to the sevenrestaurants that opened in late 2007 and early 2008.  Comparablerestaurant revenue, which included restaurants in operation over 18 months,increased 0.5% from the second quarter of 2007 to the second quarter of 2008primarily due to a price increase of approximately 4%, partially offset by adecrease in guest traffic.  Averageweekly revenue per comparable restaurant increased $388 from $79,862 in the secondquarter of 2007 to $80,250 in the second quarter of 2008.

 

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During the first half of fiscal years 2008 and 2007,we generated revenue of $49,118,323 and $36,636,146, respectively. The 34.1% increase in first half revenue was primarily the result ofthe additional restaurant operating weeks related to the seven restaurants thatopened during the second half of 2007 and first quarter of 2008.  The first half of 2008 included 635restaurant operating weeks, while the first half of 2007 included 468 operatingweeks.  Comparable restaurant revenueincreased 1.1% in the first half of 2008 over the first half of 2007.  The increase in comparable restaurant revenuewas due primarily to a price increase partially offset by a decrease in guesttraffic.  Average weekly revenue percomparable restaurant increased $859 from $79,096 in the first half of 2007 to$79,955 in the first half of 2008.

 

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 new restaurantopenings to cause fluctuations in restaurant revenue.  Additionally, consumer confidence in theeconomy and changes in consumer preferences may affect our future revenue.  We believe that decreased consumer confidencenegatively impacted the restaurant industry as a whole during the first quarterof 2008.

 

**Restaurant costs**

** **

***Foodand beverage***

** **

Our food and beveragecosts, as a percentage of revenue, increased 0.4% to 30.3% in the secondquarter of 2008 from 29.9% in the second quarter of 2007.  Such costs increased 1.0% as a percentage ofrevenue to 30.8% in the first half of 2008 from 29.8% in the first half of2007.  The increases were primarily dueto new store-openings and the increase in the cost of dairy, chicken, beef,bread, general groceries, soft drinks and beer. In order to offset these increases in commodity costs, we have takensteps to increase our oversight of inventory and kitchen management.  Additionally, we believe the price increaseof approximately 4.0% which became effective in March 2008 will continueto help address such commodity price increases. We will continue to monitor our prices in an effort to address futurecommodity price increases.

 

Weexpect that our food and beverage costs will vary going forward due to numerousvariables, including seasonal changes in food and beverage costs, and guestpreferences.  We periodically create newmenu 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.  We expect food and beveragecosts at our newer restaurants to be higher initially due to inefficienciesthat are part of the start-up process of a new restaurant.  However, as we open additional restaurants,we believe we will experience increased purchasing power company-wide,partially offsetting food and beverage cost increases, thereby enabling us tomaintain or reduce our food and beverage costs as a percentage of revenue.  Additionally, as we add new restaurants, webelieve our brewing process will allow us to keep our high quality beerproducts intact while leveraging our fixed production costs, thereby enhancingoverall profitability.

 

***Labor***

 

Labor expense consists ofrestaurant management salaries, hourly staff payroll costs, otherpayroll-related items including partner and management bonuses, and non-cashstock-based compensation expense.  Ourexperience to date has been that staff labor costs associated with a newlyopened restaurant, for approximately its first four to six months of operation,are greater than what can be expected after that time, both in aggregatedollars and as a percentage of revenue.

 

Our labor costs, as a percentage of revenue, increased 1.5% to 37.0% inthe second quarter of 2008 from 35.5% in the second quarter of 2007.  Such costs increased 2.1% as a percentage ofrevenue to 38.0% in the first half of 2008 to 35.9% in the first half of2007.  These increases were due primarilyto new store-openings and 

 

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minimumwage increases, turnover and the addition of a new position at each restaurantto oversee inventory and kitchen management in an effort to address theincreases in commodity costs.  Althoughthe immediate effect of these personnel additions was to increase labor costs,we believe we will realize an overall decrease in costs of goods in the longterm that will more than offset this labor cost increase.

 

We expect that labor costs will vary as we add new restaurants.  Minimum wage laws, local labor laws andpractices, as well as unemployment rates vary from state to state and willaffect our labor costs, as will hiring and training expenses at our newunits.  We believe that retaining goodemployees and more experienced staff ensures high quality guest service and mayreduce hiring and training costs.

 

***Direct restaurant operating***

 

Operatingsupplies, repairs and maintenance, utilities, promotions and restaurant-leveladministrative expense represent the majority of our direct restaurantoperating expense, a substantial portion of which is fixed or indirectlyvariable.  Our direct restaurantoperating expense as a percentage of revenue increased 0.7% to 14.2% in thesecond quarter of 2008 from 13.5% in the second quarter of 2007.  Such costs increased 1.0% as a percentage ofrevenue to 14.5% in the first half of 2008 from 13.5% in the first half of2007.  These increases were primarily dueto new store-openings as well as increased cost of utilities and expensesrelated to repair and maintenance at our mature properties.

 

***Occupancy***

 

Ouroccupancy costs, which include both fixed and variable portions of rent, commonarea maintenance charges, property insurance and property taxes, increased 0.4%as a percentage of revenue to 6.4% in the second quarter of 2008 from 6.0% inthe second quarter of 2007.  Such costsincreased 0.2% as a percentage of revenue to 6.4% in the first half of 2008from 6.2% in the first half of 2007. While rent expense and property tax costs increased slightly, they wereoffset in part by a decrease in property and casualty insurance.

 

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

 

Pre-opening costs, which are expensed as incurred, consist of expensesrelated to hiring and training the initial restaurant workforce, wages andexpenses of our dedicated new store opening teams, rental costs incurred duringthe construction period and certain other direct costs associated with openingnew restaurants.  Pre-opening costs,excluding construction-period rent, are primarily incurred in the month of, andtwo months prior to, the restaurant opening.

 

Pre-opening costs decreased $169,640 to $246,701 in the second quarterof 2008 from $416,341 in the second quarter of 2007.  Such costs increased $317,892 to $830,074 inthe first half of 2008 from $512,182 in the first half of 2007.  Included in such expense was $268,693 and$138,134 of non-cash rental costs incurred during construction periods in thefirst half of 2008 and 2007, respectively. Additional pre-opening costs in 2008 consisted primarily of costsrelated to the three restaurants we opened in the first quarter, whilepre-opening costs in the first half of 2007 represented primarily costs relatedto the four restaurants we opened in the second half of that year.

 

**General and administrative**

 

General and administrative expense includes all salaries and benefits,including non-cash stock-based compensation, associated with our corporatestaff that is responsible for overall restaurant quality, future expansion intonew locations, financial controls and reporting, restaurant managementrecruiting, training at Granite City University, excess capacity costs relatedto our beer production facility, and salaries and expenses of our new storeopening team when it is not dedicated to a particular restaurant opening.  Other general and administrative expenseincludes advertising, professional fees, investor relations, officeadministration, centralized accounting system costs and travel by our corporatemanagement.

 

General and administrative expense increased $872,721 to $2,780,362 inthe second quarter of 2008 from $1,907,641 in the second quarter of 2007.  Such expense increased $1,840,941 to$5,484,887 in the first half of 

 

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2008from $3,646,946 in the first half of 2007. As a percentage of revenue, general and administrative expensesincreased 0.8% in the first quarter of 2008 and 1.3% in the first half of 2008over the respective periods in 2007.  Theprimary sources of such increases were expenses related to recruiting,relocation and consulting costs, as well as accounting services and marketingexpense.  We undertook an ambitiousrecruiting plan to upgrade our overall restaurant management teams,particularly in our Kansas/Missouri markets. These increases were partially offset by decreases in insurance,non-cash stock-based compensation and an adjustment of $169,242 for the portionof our gift card obligation for which we believe the likelihood of redemptionis remote.  Non-cash stock basedcompensation included in general and administrative expense was $118,671 and$258,155 in the second quarters of 2008 and 2007, respectively, and $222,256and $384,391 in the first half of 2008 and 2007, respectively.

 

As we continue to expand our restaurant chain, we will closely monitorour general and administrative expense while seeking to preserve aninfrastructure that remains suitable for our anticipated growth.  We plan to add personnel as needed,specifically district operators, to provide better oversight of operations andwe plan to continue to improve our recruiting, training and retentioninitiatives.  While our general and administrativeexpense may increase in the near term as many of our new recruits completetheir training, we expect such expense will decrease as a percentage of revenuein the long term due to economies of scale.

 

**Depreciation and amortization**

 

Depreciation and amortization expense increased $491,006 to $1,613,411in the second quarter of 2008 from $1,122,405 in the second quarter of2007.  Such expense increased $932,329 to$3,175,057 in the first half of 2008 from $2,242,728, due principally to theadditional depreciation related to new restaurants.  As a percentage of revenue, depreciationincreased 0.3% in the second quarter of 2008 and 0.4% in the first half of 2008over the respective periods in 2007.

 

**Interest**

 

Net interest expense consists of interest expense on capital leases andlong-term debt, net of interest earned from cash on hand.  Interest expense increased $793,414 to$1,651,127 in the second quarter of 2008 from $857,713 in the second quarter of2007.  Such expense increased $1,236,675to $3,139,953 in the first half of 2008 from $1,903,278 in the first half of2007.  The increases were due toadditional capital leases as a result of new restaurants.  Interest income decreased $59,971 in thesecond quarter of 2008 and $77,239 in the first half of 2008 over therespective periods in 2007 due to the reduction of cash on hand.

 

**Liquidity and capital resources**

 

As of June 24, 2008, we had $3,766,559 of cash and a workingcapital deficit of $6,056,050 compared to $7,076,835 of cash and a working capitaldeficit of $3,668,297 at December 25, 2007.

 

During the twenty-six weeks ended June 24,2008, we used $3,766,418 of net cash in operating activities and $2,649,238 ofnet cash to purchase equipment and other assets primarily related to therestaurants we opened in the first quarter of 2008 and our restaurant in SouthBend, Indiana. We made payments aggregating $929,106 on our debt and capitallease obligations, received $4.0 million in proceeds from capital leaseobligations and received $34,486 of net cash through the exercise of stockoptions.  During the first and secondquarters of 2008, our cash used in operations was $2,722,787 and $1,043,631,respectively.  The decrease in cash usedin operations was primarily the result of the reduction of costs of sales as apercentage of revenue to 87.9% in the second quarter of 2008 compared to 91.6%in the first quarter of 2008.

 

During the twenty-six weeks ended June 26, 2007, we used $276,530of net cash in operating activities, $2,293,116 of net cash to purchaseequipment and other assets, and made payments aggregating $6,643,007 on ourdebt and capital lease obligations. Additionally, during the first quarter of 2007, we received net cash of$12,788,108 from the issuance of our common stock.

 

In April 2008, we entered into a development agreement with UnitedProperties for the development of up to 22 restaurants to be built between 2009and 2012.  As our new developer, UnitedProperties will be responsible for all costs related to the land and buildingof each restaurant.  The developmentagreement provides 

 

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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. We will lease each restaurant developed under this agreement from UnitedProperties.

 

We intend to continue expansion in markets where we believe our conceptwill have broad appeal and attractive restaurant-level economics.  We plan to continue using our restaurantprototype as we open future restaurants; however, where appropriate, we willconvert existing restaurants to our Granite City concept.  Additionally, we intend to explorealternative restaurant designs to reduce the cost of our initial capitalinvestment and we may alter our prototype to meet various state and localregulatory requirements, including, but not limited to, pollution controlrequirements, liquor license ordinances and smoking regulations.  We have signed lease agreements for alocation in South Bend, Indiana which we opened July 29, 2008, a locationin Indianapolis, Indiana which we intend to open in October 2008 and alocation in Troy, Michigan which we anticipate opening in early 2009.

 

Basedupon our existing prototype, we anticipate that pre-opening costs and theinitial purchase of furniture, fixtures and equipment will require aninvestment by us of approximately $ $1.1 million for each newrestaurant.  We anticipate that our newrestaurants will require an investment by our developer of approximately$1.8 million to $2.3 million for the building and approximately$1.2 million to $1.5 million for the purchase of the land.  We expect these costs will vary from onemarket to another based on real estate values, zoning regulations, labormarkets and other variables.

 

Pursuantto the terms of some of our lease agreements, the developer of that sitereceives a construction allowance from the landlord which, in turn, is passedon to us as a reduction in the construction cost of a new restaurant.  Landlord contributions received related torestaurants developed in 2007 and 2008 ranged from $1.0 million to$1.5 million per location.  Our netcapital investment is lower for a restaurant that receives a landlordcontribution.  In some instances weelected to use our own cash for a portion of the building costs, resulting inlower minimum lease payments.

 

Tofinance restaurant openings in 2008, we entered into a master equipment leasewith DHW Leasing, L.L.C. (“DHW”) in December 2007.  Details regarding such arrangement appearbelow under the caption “Commitments—Capital Leases.”

 

Wewill need to expend significant capital in connection with our expansionplans.  Utilizing the December 2007$16.0 million DHW Equipment Lease Commitment, of which approximately$6.0 million lease financing remained available to us as of July 29,2008, as well as expected cash flows from operations, we believe that we willhave sufficient funds to complete our currently-planned restaurant openingsthrough 2009 and maintain sufficient working capital for our operations.  If we deviate from our planned openings,experience a change in our cost of capital, are unable to obtain developerfinancing or landlord contributions, experience adverse sales trends or areunable to generate positive cash flow, we may require further funding soonerthan anticipated.  We are exploringopportunities to reduce our cash usage per restaurant by utilizing sites thatoffer lower costs of capital and real estate funding.  If our available sources of liquidity areinsufficient to fund our expected capital needs, or our needs are greater thananticipated, we will be required to raise additional funds in the futurethrough the incurrence of indebtedness or public or private sales of equitysecurities.  We continue to pursueadditional debt financing alternatives in order to solidify our expansionplans.  If we do not generate sufficientcash flow from current operations or if financing is not available to us, wewill have to curtail projected growth, which could materially adversely affectour business, financial condition, operating results and cash flows.

 

Ourability to fund our operations in future periods will depend upon our futureoperating performance, and more broadly, on the availability of equity and debtfinancing, which will be affected by prevailing economic conditions in ourindustry and financial, business and other factors, some of which are beyondour control.  We cannot assure you thatwe will obtain financing on favorable terms or at all.  If we elect to raise additional capitalthrough the issuance and sale of equity securities, the sales may be at pricesbelow the market price of our stock, and our shareholders may suffersignificant dilution.  Debt financing, ifavailable, may involve significant cash 

 

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paymentobligations, covenants and financial ratios that restrict our ability tooperate and grow our business, and would cause us to incur additional interestexpense and financing costs.

 

**Commitments**

 

*Capital Leases:*

* *

*As of June 24,2008, we operated 23 restaurants under capital lease agreements.  Of these leases, one expires in 2020, two in2023, four in 2024, three in 2025, six in 2026, four in 2027 and the remainingthree in 2028, all with renewable options for additional periods.  Twenty-one of these lease agreementsoriginated with Dunham.  Under 13 of theleases, we may be required to pay additional contingent rent based upon restaurantsales.  The land portion of these leasesis classified as an operating lease while the building portion of these leasesis classified as a capital lease because its present value was greater than 90%of the estimated fair value at the beginning of the lease and/or the lease termrepresents 75% or more of the expected life of the property.*

* *

*In December 2004,we entered 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 is exercisedat or after the end of the initial ten-year period, the option price will be$1.00.  As such, the lease is classifiedas a capital lease.*

* *

*In August 2006,we entered into a master lease agreement with Carlton Financial Corporation (“Carlton”)pursuant to which we could “finance lease” up to $3,000,000 of equipmentpurchases for three restaurant locations. As of June 24, 2008, we had entered into three lease schedules andamendments to this master lease, pursuant to which we are leasing equipment forthree locations for an initial lease term ranging from 36 to39 months.  The value of theequipment financed at each of the three locations ranges from approximately$0.8 million to $1.1 million and the annual interest rate on eachranges from 12.9% to 19.6% annually.  Wehave provided Carlton with refundable security deposits aggregating $251,165 aswell as a security interest in certain other equipment.  At the end of each initial lease term, we may(a) purchase Carlton’s interest in all, but not less than all, of theequipment for a purchase price equal to the greater of (1) the fair marketvalue of the equipment, or (2) 15% of the original cost of the equipment,or (b) renew such lease for 12 months at a monthly lease payment ofapproximately one-half of the original monthly payment and take ownership ofthe equipment thereafter for $1.00. Steven J. Wagenheim, our president, chief executive officer and oneof our 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.  Theamount of annual compensation is 3% of the balance of such lease and iscalculated and accrued based on the weighted average daily balance of the leaseat the end of each monthly accounting period.*

* *

*In December 2007,we entered into an Equipment Lease Commitment with DHW, relating to the leaseof furniture, fixtures and equipment for current and future restaurants.  Under the terms of the Equipment LeaseCommitment, DHW agreed to purchase and lease to us equipment costing up to$16.0 million.  Each five-year leaseis intended to be for equipment costing a minimum of $0.8 million and amaximum of $1.25 million per restaurant. Payments due DHW have an interest rate equal to the DHW bank base rateplus 4.8%.  Principal payments on theamounts borrowed depend upon the repayment schedule specified by the banks thathave provided the financing commitments to DHW. The lease financing is subject to the availability of financingcommitments to DHW from its lenders.  Wehave the option to purchase the leased equipment for $1.00 upon payment in fullof all rent payments due under each lease. We are not obligated to enter into any equipment leases with DHW,although we intend to enter into equipment leases with DHW for the foreseeablefuture.  DHW is not obligated to provideequipment leases for restaurants that are not developed and constructed byDunham.  While Mr. Wagenheim owns a20% membership interest in DHW and has agreed to personally guarantee 20% ofDHW’s indebtedness to its lenders, he does not receive a guarantee fee or otherpayment in connection with this DHW financing. As of July 29, 2008, DHW had purchased and leased to us equipmentat 10 of our restaurants under this Equipment Lease Commitment.  The value of the equipment financed at eachrestaurant is approximately $1.0 million and the current annual interestrate on each lease ranges from 10.3% to 12.3%.*

* *

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* *

*In June 2007,we entered into a lease for an energy optimization system at our Maple Groverestaurant 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.*

* *

As of June 24, 2008, we had entered into three 20-year net leaseagreements under the terms specified in the development agreement with Dunhamrelating to restaurant properties in South Bend and Indianapolis, Indiana andTroy, Michigan.  The land portion ofthese leases will be classified as an operating lease while the buildingportion of these leases will be classified as a capital lease.  Basic terms of the leases include annual rentequal to 10.5% of the construction cost plus the land lease and contingent rentbased on a percentage of revenue.  Thebase rent will escalate 10% at the end of each five-year period.  The term of each lease commenced or willcommence when operations begin and the Company will be responsible for anyreal-estate taxes and all operating costs. Rental costs associated with the operating lease incurred during theconstruction period are recognized as pre-opening costs and escalated rent willbe recognized as expense on a straight-line basis over the term of each lease.

 

*Operating Leases*:

 

The land portions of the 23 property leases referenced above, 21 of which originated withDunham, are classified as operating leases because the fair value of the landwas 25% or more of the leased property at the inception of each lease.  All scheduledrent increases for the land during the initial term of each lease arerecognized on a straight-line basis.  In addition tosuch property leases, we have obligations under the following operating leases:

 

In January 2001, weentered into a 20-year operating lease for the land upon which we built ourFargo restaurant.  Under the lease terms, weare obligated to annual rent of $72,000 plus contingent rent based uponrestaurant sales.

 

In August 2005, weentered into a 38-month lease agreement for office space for our corporateoffices.  The lease commenced October 1,2005. In November 2007, we entered into anamendment to such lease to include additional space commencing December 1,2007.  Pursuant to the amendedlease,which expiresin November 2011, annual rent is $96,613 with scheduled annual increasesthroughout the term of the lease.  Such scheduledrent increases are recognized on a straight-line basis over the term of thelease.

 

In November 2005, weentered into an agreement for a facility in Minneapolis, Minnesota which we useas a test kitchen.  Obligations under thisthree-year lease agreement began November 1, 2005.  The agreementcalls for annual rent of $42,000 and has an option for a three-year renewal.

 

In March 2006, weentered into a lease agreement for the land and building for our St. LouisPark, Minnesota restaurant.  Rental payments for thislease are $148,625 annually.  This operating lease expiresin 2016 with renewal options for additional periods.

 

In March, April and May 2008,we entered into 20-year net lease agreements relating to restaurants we openedor anticipate opening subsequent to the end of the second quarter of 2008 inSouth Bend and Indianapolis, Indiana and Troy, Michigan, respectively.  Each leaseagreement was entered into under the terms specified in the developmentagreement with Dunham.  The restaurantswere constructed or will be constructed for us on a build-to-suit basis.  Basic terms ofthe leases include annual rent equal to 10.5% of the construction cost plus theland lease and contingent rent.  The baserent will escalate 10% at the end of each five-year period.  The term ofeach lease commenced or will commence when operations begin and we areresponsible for any real-estate taxes and all operating costs.  Rental costsassociated with each operating lease incurred during the construction period are recognized as pre-openingcosts and escalating rent will be recognized as expense on a straight-linebasis over the term of each lease.

 

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* *

*Personal Guaranties*

* *

*Two of ourdirectors and one former director have personally guaranteed certain of ourleases and loan agreements.  Inconnection with the $1.5 million loan we obtained in July 2001 tofinance our Fargo restaurant, we entered into an agreement concerning guarantywhich provides, among other things, that such guarantors will be indemnifiedfrom any liabilities they may incur by reason of their guaranties of ourindebtedness.  Our board of directors hasagreed to compensate Steven J. Wagenheim, our president, chief executiveofficer and one of our directors, for his personal guaranties of equipment loansentered into in August 2003 and January 2004.  In August 2006, we entered into a leaseagreement with Carlton pursuant to which we may finance lease up to$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 to compensatehim.  The amount of annual compensationfor each of these guarantees is 3% of the balance of the obligation and iscalculated and accrued based on the weighted average daily balance of theobligation at the end of each monthly accounting period.  During the first half of 2008 and 2007, werecorded $49,731 and $49,927 of such compensation in general and administrativeexpense, respectively.  We paid $30,000of such compensation in the first half of 2008 and no such compensation in thefirst half of 2007.*

* *

*In December 2007,we entered into an Equipment Lease Commitment and Master Equipment Lease withDHW, relating to the lease of furniture, fixtures and equipment for current andfuture restaurants.  Under the terms ofthe Equipment Lease Commitment, DHW has agreed to purchase and lease to usequipment costing up to $16.0 million. Mr. Wagenheim owns a 20% membership interest in DHW and has agreedto personally guarantee 20% of DHW’s indebtedness to its lenders.  Neither DHW nor our company compensates Mr. Wagenheimfor this personal guarantee of DHW’s indebtedness.*

* *

*Employment Agreements:*

* *

*In June 2005,we entered into a three-year employment agreement with Steven J. Wagenheim, ourpresident and chief executive officer, who also is one of our directors.  In April 2007, we amended thecompensatory arrangements under the agreement to provide for an annual basesalary of $300,000, commencing April 1, 2007, cash incentive compensationfor 2007 ranging from $0 to $197,400 based on performance, and a stock optionfor the purchase of 100,000 shares of common stock.  In addition to annual compensation terms andother provisions, the agreement includes change in control provisions thatwould entitle Mr. Wagenheim to receive severance pay equal to18 months of salary if there is a change in control of our company and hisemployment terminates.  Our company and Mr. Wagenheimhave agreed to continue operating under the terms of this agreement until suchtime a new agreement becomes effective.*

* *

*In November 2007,we entered into an employment agreement with James G. Gilbertson providing forhis employment as our chief financial officer on an at-will basis at an annualbase salary of $225,000.  He is entitledto participate in performance-based cash bonus or equity award plans for seniorexecutives based upon goals established by our board or compensation committeeafter reasonable consultation with Mr. Gilbertson.  He may be eligible to receive a bonus of upto 50% of his base salary.  We alsogranted to Mr. Gilbertson a stock option for the purchase of 175,000shares of common stock, vesting over a two-year period, upon the commencementof his employment.  The employmentagreement provides for provisions for termination with and without cause by usand for good reason by Mr. Gilbertson and for the payment of a severancepayment equal to 12 months of base salary upon termination of employmentresulting from a change of control of our company, or if Mr. Gilbertson isterminated without cause.  The employmentagreement contains other customary terms and conditions.*

* *

*Development Agreements:*

 

In October 2002, we entered into a development agreement withDunham for the development of restaurants. Dunham is controlled by Donald A. Dunham, Jr., who is a member ofDHW and an affiliate of Granite Partners, LLC, a beneficial owner ofapproximately one percent of our securities. The agreement gave Dunham the right to develop, construct and lease upto 22 restaurants for us prior to December 31, 2012.  As of July 29, 2008, 22 restaurants hadbeen constructed for us under this development agreement and we had signed 

 

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two additional lease agreements for restaurants to open later thisyear.  Dunham also has the right to sellthe underlying land and building to third parties or assign these leases.  As of July 29, 2008, Dunham had soldfour of our restaurant sites to third parties. The assignment or sale of a lease by Dunham has had no material impacton our company.

 

In April 2008, we entered into a development agreement with UnitedProperties for the development of up to 22 restaurants to be built between 2009and 2012.  As our new developer, 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 ourmanagement for the selection of restaurant sites and the development ofrestaurants on those sites and scheduling for the development and constructionof each restaurant once a location is approved. The annual lease rate for fee-simple land and building developments willbe 9.5% and we will have the right of first offer to purchase theserestaurants.  Additionally, in the eventUnited Properties sells one of the buildings that it develops for us at anamount in excess of the threshold agreed to by the parties in the agreement,then we will share in the profits of that sale. We assume no liability in the event United Properties sells a buildingat a loss.  We are not bound to authorize the construction ofrestaurants during that time period, but generally cannot use another developerto develop or own a restaurant as long as the development agreement is ineffect.  We can, however, use anotherdeveloper if United Properties declines to build a particular restaurant.

 

*Off- balance sheet arrangements:*

 

It is not our business practice to enter intooff-balance sheet arrangements.

 

*Summary of contractual obligations:*

 

Thefollowing table summarizes our obligations under contractual agreements as of June 24,2008 and the time frame 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 or other unforeseeable events.  Therefore, neither contingent rent norseverance expense has been included in the following table.

 
| ** **                                       | ** ** | **Payments due by period** | ** **  |
|--------------------------------------------------|------------|-------------------------------------------|-------------|
| **Contractual Obligations**                 | ** ** | **Total**                                 | ** **  | **Fiscal Year  2008** | ** ** | **Fiscal Years  2009-2010** | ** ** | **Fiscal Years  2011-2012** | ** ** | **Fiscal Years  Thereafter** | ** ** |
| Long-term debt,  principal                       |       | $                                         | 1,881,400   |   | $ | 143,776 |   | $ | 601,337 |   | $ | 1,136,287 |   | $ | — |   |
| Interest on  long-term debt                      |       | 410,347                                   |        | 83,733 |   | 258,494 |   | 68,120 |   | — |   |
| Capital lease  obligations, including interest   |       | 148,627,900                               |        | 4,341,441 |   | 19,857,288 |   | 20,102,014 |   | 104,327,157 |   |
| Operating lease  obligations, including interest |       | 74,380,515                                |        | 1,824,173 |   | 7,910,765 |   | 7,891,185 |   | 56,754,394 |   |
| Loan guarantee                                   |       | 189,077                                   |        | 67,609 |   | 58,363 |   | 21,144 |   | — |   |
| Total  obligations                               |       | $                                         | 225,489,240 |   | $ | 6,460,733 |   | $ | 28,686,246 |   | $ | 29,218,748 |   | $ | 161,081,551 |   |

 

Certain amounts donot sum due to rounding.

 

Based on our cash position at June 24, 2008, the December 2007$16.0 million DHW Equipment Lease Commitment, of which approximately$6.0 million lease financing remained available to us as of July 29,2008, as well as cash generated from operations, we believe that we will have sufficient capital to meet our currentobligations.

 

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*Recent accounting pronouncements:*

 

See“Recent accounting pronouncements” section of Note 1 to our condensedconsolidated financial statements for a summary of recent accounting standards.

 

**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 existing and proposed markets.

 

**Inflation**

** **

Theprimary inflationary factors affecting our operations are food, supplies andlabor costs.  A large number 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****                 ****Quantitative andQualitative Disclosures about Market Risk**

 

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

 

*Changesin interest rate:*

 

Pursuantto the terms of our capital leases and long-term debt, we will have balloonpayments due over the next two to five years. If it becomes necessary to refinance such balloon balances, we may notbe able to secure financing at the same interest rate.  The effect of a higher interest rate woulddepend upon the negotiated financing terms.

 

*Changes in commodity prices:*

 

Manyof the food products and other commodities we use in our operations are subjectto price volatility due to market supply and demand factors outside of ourcontrol.  Extreme fluctuations incommodity prices and/or long-term changes could have an adverse affect onus.  These commodities are generallypurchased based upon market prices established with vendors.  To manage this risk in part, we attempt toenter into fixed price purchase commitments, with terms typically up to oneyear, for many of our commodity requirements. Although a large national distributor is our primary supplier of food,substantially all of our food and supplies is available from several sources,which helps to control commodity price risks. Additionally, we have the ability to increase menu prices, or vary themenu items offered, in response to food product price increases.  If, however, competitive circumstances limitour menu price flexibility, margins could be negatively impacted.

 

Our company does notenter into derivative contracts either to hedge existing risks or forspeculative purposes.

 

**ITEM4****                 ****Controls and Procedures**

 

*Evaluationof disclosure controls and procedures*

 

We maintain a system of disclosure controlsand procedures that is designed to ensure that information required to bedisclosed in our Exchange Act reports is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms,and that such information is accumulated and communicated 

 

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to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regardingdisclosures.

 

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 Chief Financial Officer concluded that, asof June 24, 2008, our disclosure controls 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 June 24,2008, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II********OTHER INFORMATION**

 

**ITEM 1****                 ****Legal Proceedings**

 

Not applicable.

 

**ITEM 1A****              ****Risk Factors**

 

Please refer to the “RiskFactors” section of our Annual Report on Form 10-K for the fiscal yearended December 25, 2007, filed with the Securities and Exchange Commissionon March 10, 2008.

 

**ITEM 2****                 ****Unregistered Sales of EquitySecurities and Use of Proceeds**

 

Not applicable.

 

**ITEM 3****                 ****Defaults upon Senior Securities**

 

Not applicable.

 

**ITEM 4****                 ****Submission of Matters to a Voteof Security Holders**

 

Not applicable.

 

**ITEM 5****                 ****Other Information**

 

Not applicable.

 

**ITEM 6****                 ****Exhibits**

 

See “Index to Exhibits.”

 

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**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:  | August 4,  2008 | 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.) |

 

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**INDEX TO EXHIBITS**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                      |
| 3.1         |       | Articles of Incorporation of the Company, as amended (incorporated by  reference to our Quarterly Report on Form  10-QSB, filed on November 13, 2002 (File No. 000-29643)).                                                     |
|        |       |                                                                                                                                                                                                                                      |
| 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)).                                                                       |
|        |       |                                                                                                                                                                                                                                      |
| 10.1        |       | Development  Agreement between United Properties Investment LLC and the Company, dated  April 30, 2008 (incorporated by reference to our Quarterly Report on  Form 10-Q, filled on May 5, 2008 (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.                                      |

 

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