**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

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**FORM10-QSB**

 
| ý | ** ** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR  THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 2004** |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                      |
| **o**  | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                   |

 

**Commission File Number 000-29643**

 

**GRANITECITY FOOD & BREWERY LTD.**

(Exact Name of Small Business Issuer asSpecified in Its Charter)

 

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

 

**5831 Cedar Lake Road**

**St. Louis Park, MN 55416**

**(952) 525-2070**

(Address of Principal Executive Offices andIssuer’s

Telephone Number, including Area Code)

 

Check whether the issuer:  (1)filed all reports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes  ý  No  o.

 

As of October 18, 2004, the issuer had outstanding 4,911,640 shares ofcommon stock and 1,000,000 Class A Warrants. The number of outstanding shares of common stock includes the sharesissuable upon separation of the units, each consisting of one share of commonstock and one redeemable Class A Warrant, sold in the issuer’s initial publicoffering.

 

Transitional Small Business Disclosure Format:

Yes  o  No  ý.

 

 

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**TABLE OF CONTENTS**

 
| **PART I**            | **FINANCIAL  INFORMATION** |                                                                                                                        |
|-----------------------|----------------------------|-----------------------------------------------------------------------------------------------------------------------------|
|                  |                       |                                                                                                                        |   |
|                  | ITEM 1                     | Financial  Statements                                                                                                       |   |
|                  |                       |                                                                                                                        |   |
|                  |                       | Condensed Balance Sheets as of December 28,  2003 and September 26, 2004                                                    |   |
|                  |                       |                                                                                                                        |   |
|                  |                       | Condensed Statements of Operations for the  thirteen and thirty-nine weeks ended September 28, 2003 and September 26,  2004 |   |
|                  |                       |                                                                                                                        |   |
|                  |                       | Condensed Statements of Cash Flows for the  thirty-nine weeks ended September 28, 2003 and September 26, 2004               |   |
|                  |                       |                                                                                                                        |   |
|                  |                       | Notes to Condensed Financial Statements                                                                                     |   |
|                  |                       |                                                                                                                        |   |
|                  | ITEM 2                     | Management’s  Discussion and Analysis or Plan of Operation                                                             |   |
|                  |                       |                                                                                                                        |   |
|                  | ITEM 3                     | Controls  and Procedures                                                                                                    |   |
|                  |                       |                                                                                                                        |   |
| **PART II**           | **OTHER  INFORMATION**     |                                                                                                                        |
|                  |                       |                                                                                                                        |   |
|                  | ITEM 1                     | Legal Proceedings                                                                                                           |   |
|                  |                       |                                                                                                                        |   |
|                  | ITEM 2                     | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                |   |
|                  |                       |                                                                                                                        |   |
|                  | ITEM 3                     | Defaults upon Senior Securities                                                                                             |   |
|                  |                       |                                                                                                                        |   |
|                  | ITEM 4                     | Submission of Matters to a Vote of Security  Holders                                                                        |   |
|                  |                       |                                                                                                                        |   |
|                  | ITEM 5                     | Other Information                                                                                                           |   |
|                  |                       |                                                                                                                        |   |
|                  | ITEM 6                     | Exhibits and Reports on Form 8-K                                                                                            |   |
|                  |                       |                                                                                                                        |   |
| **SIGNATURES**        |                       |                                                                                                                        |
|                  |                       |                                                                                                                        |   |
| **INDEX TO EXHIBITS** |                       |

 

i

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**PARTI**                                             FINANCIAL INFORMATION

 

**ITEM 1**** Financial Statements**

 

**GRANITE CITY FOOD & BREWERY LTD.**

 

# **CONDENSEDBALANCE SHEETS**

 
| ** **                                                                                                                                                                                        | ** ** | **December 28,  2003** | ** ** | **September 26,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **(audited)**          | ** ** | **(unaudited)**         | ** ** |
| **ASSETS:**                                                                                                                                                                                       |       |                   |       |                    |       |
| Current assets:                                                                                                                                                                                   |       |                   |       |                    |       |
| Cash                                                                                                                                                                                              |       | $                      | 1,439,960  |                    | $          | 2,144,338 |   |
| Inventory                                                                                                                                                                                         |       | 177,176                |       | 277,400                 |       |
| Prepaids and other                                                                                                                                                                                |       | 145,857                |       | 271,024                 |       |
| Total current assets                                                                                                                                                                              |       | 1,762,993              |       | 2,692,762               |       |
|                                                                                                                                                                                              |       |                   |       |                    |       |
| Property and equipment, net                                                                                                                                                                       |       | 15,177,392             |       | 22,031,747              |       |
| Intangible assets and other                                                                                                                                                                       |       | 381,782                |       | 394,406                 |       |
| Total assets                                                                                                                                                                                      |       | $                      | 17,322,167 |                    | $          | 25,118,915 |   |
|                                                                                                                                                                                              |       |                   |       |                    |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY:**                                                                                                                                                    |       |                   |       |                    |       |
| Current liabilities:                                                                                                                                                                              |       |                   |       |                    |       |
| Accounts payable                                                                                                                                                                                  |       | $                      | 460,160    |                    | $          | 695,004 |   |
| Accrued expenses                                                                                                                                                                                  |       | 1,293,241              |       | 1,513,156               |       |
| Line of credit                                                                                                                                                                                    |       | —                 |       | 199,102                 |       |
| Long-term debt, current portion                                                                                                                                                                   |       | 122,584                |       | 222,596                 |       |
| Capital lease obligations, current portion                                                                                                                                                        |       | 362,920                |       | 501,305                 |       |
| Total current liabilities                                                                                                                                                                         |       | 2,238,905              |       | 3,131,163               |       |
|                                                                                                                                                                                              |       |                   |       |                    |       |
| Long-term debt, net of current portion                                                                                                                                                            |       | 2,056,752              |       | 2,562,413               |       |
| Capital lease obligations, net of current  portion                                                                                                                                                |       | 6,702,352              |       | 11,884,838              |       |
| Total liabilities                                                                                                                                                                                 |       | 10,998,009             |       | 17,578,414              |       |
|                                                                                                                                                                                              |       |                   |       |                    |       |
| Shareholders’ equity:                                                                                                                                                                        |       |                   |       |                    |       |
| Common stock, $0.01 par value, 90,000,000  shares authorized; 4,044,120 and 4,911,640 shares issued and outstanding at December  28, 2003 and September 26, 2004, respectively                    |       | 40,441                 |       | 49,116                  |       |
| Preferred stock, $0.01 par value,  10,000,000 authorized; 55,500 and 54,355 Series A Convertible Preferred  shares issued and outstanding December 28, 2003 and September 26, 2004,  respectively |       | 555                    |       | 544                     |       |
| Additional paid-in capital                                                                                                                                                                        |       | 10,070,429             |       | 12,366,334              |       |
| Stock dividends distributable                                                                                                                                                                     |       | 702                    |       | —                  |       |
| Accumulated deficit                                                                                                                                                                               |       | (3,787,969             | )          | (4,875,493              | )          |
| Total shareholders’ equity                                                                                                                                                                   |       | 6,324,158              |       | 7,540,501               |       |
|                                                                                                                                                                                              |       |                   |       |                    |       |
| Total liabilities and shareholders’ equity                                                                                                                                                   |       | $                      | 17,322,167 |                    | $          | 25,118,915 |   |

 

See notes to condensed financial statements.

 

1

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**GRANITE CITY FOOD & BREWERY LTD.**

 

**CONDENSED STATEMENTS OF OPERATIONS**

**(Unaudited)**

** **
| ** **                                          | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|-----------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **September 28,  2003**  | ** ** | **September 26,  2004**     | ** ** | **September 28,  2003** | ** ** | **September 26,  2004** | ** ** |
|                                                |       |                     |       |                        |       |   |   |   |   |
| Restaurant revenues                                 |       | $                        | 3,786,885  |                        | 9,279,191  |   | $ | 9,768,071 |   | $ | 23,197,994 |   |
|                                                |       |                     |       |                        |       |   |   |   |   |
| Cost of sales:                                      |       |                     |       |                        |       |   |   |   |   |
| Food, beverage and retail                           |       | 1,094,291                |       | 2,819,515                   |       | 2,822,489 |   | 7,029,332 |   |
| Labor                                               |       | 1,274,087                |       | 3,096,410                   |       | 3,320,948 |   | 7,666,094 |   |
| Direct and occupancy                                |       | 804,760                  |       | 1,710,215                   |       | 2,121,687 |   | 4,357,408 |   |
| Total cost of sales                                 |       | 3,173,138                |       | 7,626,140                   |       | 8,265,124 |   | 19,052,834 |   |
|                                                |       |                     |       |                        |       |   |   |   |   |
| Pre-opening                                         |       | 270,729                  |       | —                      |       | 270,729 |   | 748,323 |   |
| General and administrative                          |       | 449,833                  |       | 619,888                     |       | 1,156,256 |   | 1,813,950 |   |
| Depreciation and amortization                       |       | 206,276                  |       | 463,263                     |       | 596,471 |   | 1,178,273 |   |
|                                                |       |                     |       |                        |       |   |   |   |   |
| Operating income (loss)                             |       | (313,091                 | )          | 569,900                     |       | (520,509 | ) | 404,614 |   |
|                                                |       |                     |       |                        |       |   |   |   |   |
| Interest:                                           |       |                     |       |                        |       |   |   |   |   |
| Income                                              |       | 15,266                   |       | 749                         |       | 62,148 |   | 4,941 |   |
| Expense                                             |       | (133,685                 | )          | (326,070                    | )          | (378,860 | ) | (837,368 | ) |
| Other expense, net                                  |       | —                   |       | (23,520                     | )          | — |   | (23,520 | ) |
| Net other expense                                   |       | (118,419                 | )          | (348,841                    | )          | (316,712 | ) | (855,947 | ) |
|                                                |       |                     |       |                        |       |   |   |   |   |
| Net income (loss)                                   |       | (431,510                 | )          | 221,059                     |       | (837,221 | ) | (451,333 | ) |
| Less preferred stock dividends declared             |       | (168,854                 | )          | (108,710                    | )          | (433,935 | ) | (564,526 | ) |
| Net income (loss) available to common  shareholders |       | $                        | (600,364   | )                           | $          | 112,349 |   | $ | (1,271,156 | ) | $ | (1,015,859 | ) |
|                                                |       |                     |       |                        |       |   |   |   |   |
| Income (loss) per common share, basic               |       | $                        | (0.15      | )                           | $          | 0.03 |   | $ | (0.33 | ) | $ | (0.24 | ) |
|                                                |       |                     |       |                        |       |   |   |   |   |
| Income (loss) per common share, diluted             |       | $                        | (0.15      | )                           | $          | 0.02 |   | $ | (0.33 | ) | $ | (0.24 | ) |
|                                                |       |                     |       |                        |       |   |   |   |   |
| Weighted average shares outstanding, basic          |       | 3,947,700                |       | 4,378,774                   |       | 3,888,038 |   | 4,261,048 |   |
|                                                |       |                     |       |                        |       |   |   |   |   |
| Weighted average shares outstanding,  diluted       |       | 3,947,700                |       | 9,296,411                   |       | 3,888,038 |   | 4,261,048 |   |

 

See notes to condensed financial statements.

 

2

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**GRANITE CITY FOOD & BREWERY LTD.**

 

**CONDENSED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

** **
| ** **                                                                                 | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                 | ** ** | **September 28,  2003**     | ** ** | **September 26,  2004** | ** ** |
|                                                                                       |       |                        |       |   |   |
| Cash flows from operating activities:                                                      |       |                        |       |   |   |
| Net loss                                                                                   |       | $                           | (837,221   | ) | $ | (451,333 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                        |       |   |   |
| Depreciation and amortization                                                              |       | 596,471                     |       | 1,178,273 |   |
| Loss on disposal of asset                                                                  |       | —                      |       | 23,520 |   |
| Stock option/warrant compensation                                                          |       | 9,762                       |       | 19,170 |   |
| Decrease (increase) in:                                                                    |       |                        |       |   |   |
| Inventory                                                                                  |       | (99,364                     | )          | (100,224 | ) |
| Prepaids and other                                                                         |       | (167,159                    | )          | (125,167 | ) |
| Increase (decrease) in:                                                                    |       |                        |       |   |   |
| Accounts payable                                                                           |       | 187,107                     |       | 149,110 |   |
| Accrued expenses                                                                           |       | (6,704                      | )          | 111,205 |   |
| Net cash provided by (used in) operating  activities                                       |       | (317,108                    | )          | 804,554 |   |
|                                                                                       |       |                        |       |   |   |
| Cash flows from investing activities:                                                      |       |                        |       |   |   |
| Purchase of:                                                                               |       |                        |       |   |   |
| Property and equipment                                                                     |       | (1,950,915                  | )          | (2,278,350 | ) |
| Intangible assets and other                                                                |       | (38,578                     | )          | (29,560 | ) |
| Net cash used in investing activities                                                      |       | (1,989,493                  | )          | (2,307,910 | ) |
|                                                                                       |       |                        |       |   |   |
| Cash flows from financing activities:                                                      |       |                        |       |   |   |
| Payments on capital lease obligations                                                      |       | (208,952                    | )          | (354,257 | ) |
| Payments on long term-debt                                                                 |       | (22,907                     | )          | (144,327 | ) |
| Proceeds from line of credit                                                               |       | —                      |       | 199,102 |   |
| Payment of dividends                                                                       |       | (168,384                    | )          | (108,783 | ) |
| Proceeds from long-term debt                                                               |       | 428,572                     |       | 750,000 |   |
| Proceeds from issuance of stock                                                            |       | 1,381,989                   |       | 1,865,999 |   |
| Net cash provided by financing activities                                                  |       | 1,410,318                   |       | 2,207,734 |   |
|                                                                                       |       |                        |       |   |   |
| Net increase (decrease) in cash                                                            |       | (896,283                    | )          | 704,378 |   |
| Cash, beginning                                                                            |       | 3,521,842                   |       | 1,439,960 |   |
| Cash, ending                                                                               |       | $                           | 2,625,559  |   | $ | 2,144,338 |   |
|                                                                                       |       |                        |       |   |   |
| Supplemental disclosure of non-cash  investing activities:                                 |       |                        |       |   |   |
| Buildings acquired under capital lease  agreements                                         |       | $                           | 1,656,114  |   | $ | 5,675,128 |   |

 

See notes to condensed financial statements.

 

3

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**GRANITE CITY FOOD & BREWERY LTD.**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

 

Thirteen and thirty-nine weeks endedSeptember 28, 2003 and September 26, 2004

 

**1.****              Natureof business and basis of presentation:**

 

Nature of business:

Granite City Food & Brewery Ltd. (“the Company”) was formed todevelop and operate casual dining restaurants featuring on-premisebreweries.  The Company is developingthese restaurant-microbreweries, known as Granite City Food & Brewery®, inselected markets throughout the United States. The theme is casual dining with a wide variety of menu items that areprepared fresh daily, combined with freshly brewed hand-crafted beers madeon-premise.  The Company produces itsbeer using a process called Fermentus InterruptusTM, which is intended tomaintain high beer quality while enhancing overall profitability by reducingunit-level brewing costs.  The firstfacility, located in St. Cloud, Minnesota, opened in July 1999.  Subsequently, the Company opened restaurantsin Sioux Falls, South Dakota; Fargo, North Dakota; West Des Moines, CedarRapids and Davenport, Iowa, Lincoln, Nebraska and Minneapolis, Minnesota.

 

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

 

Interim financial statements:

The Company has prepared the condensed financial statements for thethirteen and thirty-nine weeks ended September 28, 2003 and September 26, 2004without audit by the Company’s independent auditors.  In the opinion of the Company’s management,all adjustments necessary to present fairly the financial position of theCompany at September 26, 2004 and the results of operations and cash flows forthe periods ended September 28, 2003 and September 26, 2004 have been made.Those adjustments consist only of normal and recurring adjustments.

 

Thebalance sheet at December 28, 2003 has been derived from the audited financialstatements at that date, but does not include all of the information and notesrequired by generally accepted accounting principles for complete financialstatements.  Certain informationand note disclosures normally included in the Company’s annual financialstatements have been condensed or omitted. These condensed financial statements should be read in conjunction withthe financial statements and notes thereto included in the Company’s AnnualReport on Form 10-KSB for the fiscal year ended December 28, 2003, filed withthe Securities and Exchange Commission on March 29, 2004.

 

The results of operations for the thirteen and thirty-nine weeks endedSeptember 26, 2004 are not necessarily indicative of the results to be expectedfor the entire year.

 

Earnings (loss) per share:

Basic earnings(loss) per common share is calculated by dividing net income (loss) lesspreferred stock dividends declared by the weighted average number of commonshares outstanding.  Diluted earnings percommon share assumes that outstanding common shares were increased by sharesissuable upon exercise of stock options and warrants for which market priceexceeds exercise price, less shares which could have been purchased by theCompany with the related proceeds. Diluted earnings also assumes convertible preferred stock is convertedto common stock and increases the outstanding common shares, and net incomeavailable to common shareholders is increased by dividends payable on thatconvertible preferred 

 

4

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stock.  Calculations of the Company’s net income(loss) per common share for the thirteen and thirty-nine weeks ended September28, 2003 and September 26, 2004 are set forth in the following table:

 
| ** **                                    | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **September 28,  2003**  | ** ** | **September 26,  2004**     | ** ** | **September 28,  2003** | ** ** | **September 26,  2004** | ** ** |
|                                          |       |                     |       |                        |       |   |   |   |   |
| Net income (loss)                             |       | $                        | (431,510   | )                           | $          | 221,059 |   | $ | (837,221 | ) | $ | (451,333 | ) |
| Less dividends declared                       |       | (168,854                 | )          | (108,710                    | )          | (433,935 | ) | (564,526 | ) |
| Net loss available to common shareholders     |       | $                        | (600,364   | )                           | $          | 112,349 |   | $ | (1,271,156 | ) | $ | (1,015,859 | ) |
|                                          |       |                     |       |                        |       |   |   |   |   |
| Income (loss) per common share, basic         |       | $                        | (0.15      | )                           | $          | 0.03 |   | $ | (0.33 | ) | $ | (0.24 | ) |
|                                          |       |                     |       |                        |       |   |   |   |   |
| Income (loss) per common share, diluted       |       | $                        | (0.15      | )                           | $          | 0.02 |   | $ | (0.33 | ) | $ | (0.24 | ) |
|                                          |       |                     |       |                        |       |   |   |   |   |
| Weighted average shares outstanding, basic    |       | 3,947,700                |       | 4,378,774                   |       | 3,888,038 |   | 4,261,048 |   |
|                                          |       |                     |       |                        |       |   |   |   |   |
| Weighted average shares outstanding,  diluted |       | 3,947,700                |       | 9,296,411                   |       | 3,888,038 |   | 4,261,048 |   |
|                                               |            |                          |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |

 

**2.****              Stockcompensation:**

 

The Company accounts for its stock-based compensation awards using theintrinsic value method prescribed by Accounting Principles Board (APB) OpinionNo. 25, *Accounting for Stock Issued toEmployees. *No compensationcost has been recognized for options issued to employees when the exerciseprice of the options granted is at least equal to the fair value of the commonstock on the date of grant.  Hadcompensation cost been determined consistent with Statement of Financial AccountingStandard (SFAS) No. 123, *Accounting forStock-Based Compensation*, as amended by SFAS No. 148, *Accounting for Stock-Based Compensation—Transitionand Disclosure,* the Company’s net income (loss) and net income(loss) per common share would have been changed to the following pro formaamounts:

 
| ** **                                                                                                                                  | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                  | ** ** | **September 28,  2003**  | ** ** | **September 26,  2004**     | ** ** | **September 28,  2003** | ** ** | **September 26,  2004** | ** ** |
| Net income (loss):                                                                                                                          |       |                     |       |                        |       |   |   |   |   |
| As reported                                                                                                                                 |       | $                        | (431,510   | )                           | $          | 221,059 |   | $ | (837,221 | ) | $ | (451,333 | ) |
| Less: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | $                        | (58,272    | )                           | $          | (147,677 | ) | $ | (273,285 | ) | $ | (470,199 | ) |
| Pro forma                                                                                                                                   |       | $                        | (489,782   | )                           | $          | 73,382 |   | $ | (1,110,506 | ) | $ | (921,532 | ) |
|                                                                                                                                        |       |                     |       |                        |       |   |   |   |   |
| Net income (loss) per common share                                                                                                          |       |                     |       |                        |       |   |   |   |   |
| Basic as reported                                                                                                                           |       | $                        | (0.15      | )                           | $          | 0.03 |   | $ | (0.33 | ) | $ | (0.24 | ) |
| Basic pro forma                                                                                                                             |       | $                        | (0.17      | )                           | $          | (0.01 | ) | $ | (0.40 | ) | $ | (0.35 | ) |
| Diluted, as reported                                                                                                                        |       | $                        | (0.15      | )                           | $          | 0.02 |   | $ | (0.33 | ) | $ | (0.24 | ) |
| Diluted, pro forma                                                                                                                          |       | $                        | (0.17      | )                           | $          | 0.01 |   | $ | (0.40 | ) | $ | (0.35 | ) |

 

5

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

 
| ** **              | ** ** | **2003**   | ** ** | **2004**   | ** ** |
|-------------------------|------------|------------|------------|------------|------------|
| Dividend yield          |       | None       |       | None       |       |
| Expected volatility     |       | 75.0%      |       | 54.6%      |       |
| Expected life of option |       | 5-10 years |       | 5-10 years |       |
| Risk-free interest rate |       | 4.2%       |       | 4.0%       |       |

 

**3.****              Changein capitalization:**

 

Exercise of warrants and options:

Duringthe first quarter of 2004, the Company issued an aggregate of 40,822 shares ofcommon stock to accredited investors upon the conversion of 645 shares ofSeries A Convertible Preferred Stock originally issued on October 1, 2002.  The convertible preferred stock was convertedat $1.58 per share.

 

Duringthe first quarter of 2004, the Company issued an aggregate of 31,645 shares ofcommon stock to accredited investors upon the exercise for cash of warrantsoriginally issued on October 1, 2002, in connection with a private placement ofSeries A Convertible Preferred Stock and warrants.  Each warrant was exercised at $1.58 pershare.

 

As part of the Company’s initial public offering, the Company sold tothe underwriter, for $100, stock purchase warrants for the purchase of anaggregate of 100,000 units exercisable at $4.95 per unit after June 6, 2001.Each unit consists of one share of common stock and one warrant to purchase oneshare of common stock at an exercise price of $5.00 per share, subject toadjustment.  The agreement that set forththe terms and conditions of these warrants contains certain anti-dilutionprovisions.  Pursuant to theseprovisions, the number of shares purchasable upon exercise of these warrantsand the related purchase price both required adjustment upon the issuance ofcommon stock in lieu of cash dividends to the holders of the Company’s Series AConvertible Preferred Stock.  Thesewarrants also provide for a cashless exercise provision and expire on June 6,2005.  During the first quarter of 2004,the Company issued 6,514 units upon the cashless exercise of 19,368 of suchwarrants.  As a result of these exercisesand the anti-dilution adjustments, as of September 26, 2004, the number ofunits purchasable under these warrants was 87,670 and the exercise price was$4.61 per unit.

 

Duringthe second quarter of 2004, the Company issued 15,822 shares of common stock toan accredited investor upon the exercise for cash of warrants originally issuedon October 1, 2002, in connection with a private placement of Series AConvertible Preferred Stock and warrants. Each warrant was exercised at $1.58 per share.

 

Duringthe second quarter of 2004, the Company issued 31,645 shares of common stock toan accredited investor upon the conversion of 500 shares of Series AConvertible Preferred Stock originally issued on October 1, 2002.  The convertible preferred stock was convertedat $1.58 per share.

 

As part of the Company’s initial public offering, the Company sold1,000,000 units, each unit consisting of one share of common stock and oneredeemable Class A warrant.  Each Class Awarrant entitles the holder to purchase one share of common stock at anexercise price of $5.00 per share.  Theagreement that set forth the terms and conditions of the Class A Warrantscontains certain anti-dilution provisions. Pursuant to these provisions, the number of shares purchasable uponexercise of these warrants and the related purchase price both requiredadjustment upon the issuance of common stock in lieu of cash dividends to theholders of the Company’s Series A Convertible Preferred Stock. As a result ofthese adjustments and the issuance, pursuant to Registration File No. 333-93459,of 1,072 shares of common stock upon the exercise of such warrants in May 2004at an exercise price of $4.66, the number of shares 

 

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purchasable under these warrants at September 26, 2004 was 1,071,889and the exercise price was $4.66 per share. The warrants expire on June 6, 2005.

 

On August 18, 2004, one of the Company’s directors exercised a stockoption for the purchase of 5,000 shares of common stock at an exercise price of$1.25 per share.  These options wereissued pursuant to the 1997 Director Stock Option Plan.

 

On September 20, 2004, one of the Company’s employees exercised a stockoption for the purchase of 3,000 shares of common stock at an exercise price of$1.65 per share.  These options wereissued pursuant to the 1997 Stock Option Plan.

 

Dividends:

OnDecember 10, 2003, the Company authorized payment of dividends to holders ofits preferred stock as of December 23, 2003. Such dividends were paid on December 31, 2003 through the issuance of anaggregate of 70,230 shares of common stock valued at $1.58 per share.  The closing price of the stock on December23, 2003 was $3.97 per share. Additionally, $37 cash in lieu of fractional shares was distributed.

 

On March 11, 2004, the Company authorized payment of dividends toholders of its preferred stock as of March 23, 2004.  Such dividends were paid on March 31, 2004through the issuance of an aggregate of 69,414 shares of common stock valued at$1.58 per share.  The closing price ofthe stock on March 23, 2004 was $5.00 per share.  Additionally, $36 cash in lieu of fractionalshares was distributed.

 

On June 15, 2004, the Company authorized cash payment of dividends toholders of its preferred stock as of June 23, 2004.  Such dividends aggregated $108,710 and werepaid on June 30, 2004.

 

On September 9, 2004, the Company authorized cash payment of dividendsto holders of its preferred stock as of September 23, 2004.  Such dividends aggregated $108,710, wereincluded in accrued expenses on the Company’s balance sheet at September 26,2004 and were paid on September 30, 2004.

 

Issuance of common stock and warrants to purchase common stock:

On September 17, 2004, the Company entered into a securities purchase agreementwith accredited investors for the sale of approximately $8.5 million of commonstock and warrants to purchase common stock.  Theagreement provided for securities to be sold at an offering price of $3.25 pershare of common stock, with one warrant for every 2.5 shares of common stocksold.  The warrants have a term of fiveyears and are exercisable at $5.00 per share, subject to certain anti-dilutionadjustments.  The Companycompleted the initial closing of this private placement, generating grossproceeds of $1,925,157 with the sale of 592,356 shares of common stock andissuance of warrants to purchase 236,944 shares of common stock.  In connection with the initial closing, theCompany issued its agent a warrant to purchase 29,618 shares of common stock atan exercise price of $5.00 per share, paid its agent cash commission of $96,258and paid expenses related to the transaction of $125,341.  Completionof the sale of the remaining shares and warrants is subject to approval by theCompany’s shareholders in compliance with Nasdaq Marketplace Rules.

 

**4.****              Lineof credit:**

 

InApril 2004, the Company entered into a revolving line of credit agreement withmaximum availability of $750,000 with an independent financialinstitution.  The Company paid annualinterest at a rate of 6.75% on amounts it borrowed, which interest paymentsaggregated approximately $5,307.  Thisline of credit expired September 1, 2004, at which time the Company renewed theline at an annual interest rate of 7.00%. This line of credit is secured by substantially all the personalproperty of the Company, is guaranteed by one of the Company’s directors andexpires September 15, 2005.  As ofSeptember 26, 2004, the Company had $199,102 outstanding on this line.

 

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**5.****             ****Provision for income taxes:**

 

Aprovision for income taxes was not recorded in the third quarter of 2004because a provision for income tax is not anticipated for the entire fiscalyear 2004.

 

**ITEM 2********     Management’sDiscussion and Analysis or Plan of Operation**

 

*This discussion and analysis contains variousnon-historical forward-looking statements within the meaning of Section 21E ofthe 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 thoseprojected.  When used in the followingdiscussion, the words “anticipates,” “believes,” “expects,” “intends,” “plans,”“estimates” and similar expressions, as they relate to us or our management,are intended to identify such forward-looking statements.  You are cautioned not to place undue relianceon such forward-looking statements, which are qualified in their entirety bythe cautions and risks described herein. Please refer to our Annual Report on Form 10-KSB for the fiscal yearended December 28, 2003, filed with the Securities and Exchange Commission onMarch 29, 2004, for additional factors known to us that may cause actual resultsto vary.*

 

**Overview**

 

We operate eight casual dining restaurants featuringon-premises breweries under the name Granite City Food & Brewery®.  Our activities through June 1999 were relatedto the development of our restaurant-microbrewery concept and the developmentand financing of our first restaurant which commenced operations in St. Cloud,Minnesota, in June 1999.  Over the nexttwo-and one-half years, we opened a restaurant in Sioux Falls, South Dakota anda restaurant in Fargo, North Dakota.  Wedeveloped these restaurants using the net proceeds from a private placement ofcommon stock completed in late 1997, an initial public offering in June 2000,financing in the form of long-term building and equipment leases, bankfinancing, and loans from a related party.

 

After opening two additional restaurants during thelater part of 2003 located in West Des Moines and Cedar Rapids, Iowa, we openedthree restaurants in 2004.  Theserestaurants opened in Davenport, Iowa; Lincoln, Nebraska; and Minneapolis,Minnesota.  We developed theserestaurants using the proceeds we obtained through the private placement ofconvertible preferred stock and warrants to purchase common stock in the fourthquarter of 2002, as well as equipment loans and a line of credit.  These five units were designed using theprototype we developed in early 2003. Based on the performance of these units, management plans to continue touse this prototype for future expansion. These five units were developed under our multi-site developmentagreement with a commercial developer that provides us assistance in siteselection, construction management and financing for new restaurants.  Under this agreement, we lease each newrestaurant from our developer.

 

In September 2004, we entered into a securitiespurchase agreement with accredited investors for the sale of approximately $8.5million of common stock and warrants to purchase common stock.  Using the proceeds from this privateplacement and equipment loans as needed, we intend to add four additionalrestaurant units in 2005, six units in 2006, and eight units in 2007.  We completed the initial closing of thisprivate placement, generating aggregate gross proceeds of $1,925,157, inSeptember 2004.  Completion ofthe sale of the remaining shares and warrants is subject to approval by ourshareholders in compliance with Nasdaq Marketplace Rules.

 

We have developed a brewing process called FermentusInterruptus.  We believe that FermentusInterruptus improves the economics of our microbrewing process as it eliminatesthe initial stages of brewing and storage at multiple locations, therebyreducing equipment and development costs at new restaurant locations.  Having a common starting point for ourinitial brewing process creates consistency of taste for our product from unitto unit.  We believe that FermentusInterruptus gives us the ability to improve unit level economics whilemaintaining the consistency of our beers.  This commissary brewing process will allow us 

 

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to service approximately 28 locations from one wortproduction site.    We are evaluatingstrategies for capitalizing on Fermentus Interruptus, including licensing ofour brewing technology.

 

We believe that our operating results will fluctuatesignificantly because of several factors, including the timing of newrestaurant openings and related expenses, profitability of new restaurants,changes in food and labor costs, increases or decreases in comparablerestaurant sales, general economic conditions, consumer confidence in theeconomy, changes in consumer preferences, competitive factors and weatherconditions.

 

Our restaurant revenues are comprised almost entirelyof the sales of food and beverages.  Thesale of retail items, such as cigarettes and promotional items, typicallyrepresent approximately 0.3% to 0.7% of total revenue.  Product costs include the costs of food,beverages and retail items.  Labor costsinclude direct hourly and management wages, taxes and benefits for restaurantemployees.  Direct and occupancy costsinclude restaurant supplies, marketing costs, rent, utilities, real estatetaxes, repairs and maintenance and other related costs.  Pre-opening costs consist of direct costsrelated to hiring and training the initial restaurant workforce and certainother direct costs associated with opening new restaurants.  General and administrative expenses arecomprised of expenses associated with all corporate and administrative functionsthat support existing operations, management and staff salaries, employeebenefits, travel, information systems and training and market research.  Depreciation and amortization includesdepreciation on capital expenditures. Other income and expense primarily represents the cost of interestexpense on debt and capital leases and interest income on invested assets.

 

**Results of Operations**

 

The following table compares operating resultsexpressed as a percentage of total revenue for the thirteen and thirty-nineweeks ended September 28, 2003 and September 26, 2004.

 
| ** **                    | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|-------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **September 28,  2003**  | ** ** | **September 26,  2004**     | ** ** | **September 28,  2003** | ** ** | **September 26,  2004** | ** ** |
|                          |       |                     |       |                        |       |   |   |   |   |
| Restaurant revenues           |       | 100.0                    | %          | 100.0                       | %          | 100.0 | % | 100.0 | % |
|                          |       |                     |       |                        |       |   |   |   |   |
| Cost of sales:                |       |                     |       |                        |       |   |   |   |   |
| Food, beverage and retail     |       | 28.9                     |       | 30.4                        |       | 28.9 |   | 30.3 |   |
| Labor                         |       | 33.6                     |       | 33.4                        |       | 34.0 |   | 33.0 |   |
| Direct and occupancy          |       | 21.3                     |       | 18.4                        |       | 21.7 |   | 18.8 |   |
| Total cost of sales           |       | 83.8                     |       | 82.2                        |       | 84.6 |   | 82.1 |   |
|                          |       |                     |       |                        |       |   |   |   |   |
| Pre-opening                   |       | 7.1                      |       | —                      |       | 2.8 |   | 3.2 |   |
| General and administrative    |       | 11.9                     |       | 6.7                         |       | 11.8 |   | 7.8 |   |
| Depreciation and amortization |       | 5.4                      |       | 5.0                         |       | 6.1 |   | 5.1 |   |
|                          |       |                     |       |                        |       |   |   |   |   |
| Operating income (loss)       |       | (8.3                     | )          | 6.1                         |       | (5.3 | ) | 1.7 |   |
|                          |       |                     |       |                        |       |   |   |   |   |
| Interest:                     |       |                     |       |                        |       |   |   |   |   |
| Income                        |       | 0.4                      |       | 0.0                         |       | 0.6 |   | 0.0 |   |
| Expense                       |       | (3.5                     | )          | (3.5                        | )          | (3.9 | ) | (3.6 | ) |
| Other expense, net            |       | —                   |       | (0.3                        | )          | — |   | (0.1 | ) |
| Net other expense             |       | (3.1                     | )          | (3.8                        | )          | (3.2 | ) | (3.7 | ) |
|                          |       |                     |       |                        |       |   |   |   |   |
| Net income (loss)             |       | (11.4                    | )%         | 2.4                         | %          | (8.6 | )% | (1.9 | )% |

 

Certain percentage amounts donot sum due to rounding.

 

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**CriticalAccounting Policies**

 

This discussion and analysisis based upon our consolidated financial statements, which were prepared inconformity with generally accepted accounting principles.  These principles require management to makeestimates and assumptions that affect the amounts reported in the consolidatedfinancial statements and accompanying notes. We believe our estimates and assumptions are reasonable; however, actualresults and the timing of the recognition of such amounts could differ fromthose estimates.  We have identified thefollowing critical accounting policies and estimates utilized by management inthe preparation of our financial statements:

 

*Property and equipment*

 

The cost of property andequipment is depreciated over the estimated useful lives of the related assetsranging from three to 20 years.  The costof leasehold improvements is depreciated over the length of the related lease.  Depreciation is computed on the straight-linemethod for financial reporting purposes and accelerated methods for income taxpurposes.  Amortization of assetsacquired under capital lease is included in depreciation expense.  Our accounting policies regarding propertyand equipment include certain management judgments regarding the estimateduseful lives of such assets and the determination as to what constitutesenhancing the value of or increasing the life of existing assets.  These judgments and estimates may producematerially different amounts of depreciation and amortization expense thanwould be reported if different assumptions were used.

 

We continually reassess ourassumptions and judgments and make adjustments when significant facts andcircumstances dictate.  Historically,actual results have not been materially different than the estimates we havemade.

 

**Resultsof Operations for the Thirteen and Thirty-nine Weeks Ended September 28, 2003and September 26, 2004**

 

**Revenue**

 

We generated $3,786,885 and $9,279,191 of revenuesduring the third quarter of 2003 and 2004, respectively, with average weeklysales increasing from $88,067 to $89,223 over the same periods.  During the first three quarters of 2003 wehad revenues of $9,768,071 while we had revenues of $23,197,994 during thecomparable period of 2004.  Averageweekly sales for the comparable thirty-nine week periods increased from $80,728in fiscal year 2003 to $87,540 in fiscal year 2004.  The overall 137.5% increase in revenuesduring the first three quarters of the current fiscal year was due primarily tothe successful opening of five new prototype restaurants since September 2,2003.

 

We anticipate that restaurant revenues will vary fromquarter to quarter.  We anticipateseasonal fluctuations in restaurant revenues due in part to increased outdoorseating and generally favorable weather conditions at all locations during thesummer months.  A restaurant typicallyexperiences a temporary period of high revenues immediately following itsopening due to increased demand fostered by the publicity surrounding theopening (the “honeymoon effect”).  Weexperienced this effect throughout the first three quarters of the currentfiscal year due to our expansion in late 2003 and in the first half of2004.  Therefore, we expect the timing ofnew restaurant openings to cause fluctuations in restaurant revenues.  Additionally, consumer confidence in theeconomy and changes in consumer preferences may affect our future revenues.

 

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**Cost of Sales**

 

*Food, Beverage and Retail*

 

Our food, beverage and retail cost increased 1.5% as apercentage of revenues during the thirteen weeks ended September 26, 2004compared to the thirteen-week period ended September 28, 2003.  These costs increased 1.4% as a percentage ofrevenue during the first three quarters of 2004 compared to the first threequarters of 2003.   The increases weexperienced were due primarily to new staff members becoming familiar with ouroperations as we opened restaurants in late 2003 and early 2004, as well asproduct price increase in some areas, particularly chicken, beef and dairy.

 

We expect that our food and beverage costs will varygoing forward due to numerous variables, including seasonal changes in foodcosts and guest preferences.  Weperiodically create new menu offerings and introduce new craftbrewed beersbased upon guest preferences.  Althoughsuch menu modifications may temporarily result in increased food and beveragecost, we believe we are able to offset such increases with our weekly specialswhich provide variety to our guests at a great price value.  Our varieties of craftbrewed beer, which wecan produce at lower cost than beers we purchase for resale, also enable us tokeep our food and beverage costs low while fulfilling guest requests andbuilding customer loyalty.  As we haveopened additional units, we have experienced increased purchasing power andbelieve we will continue to do so with additional expansion, thereby mitigatingproduct price increases and maintaining or reducing our food and beverage costsas a percentage of revenues. Additionally, as we add new units, we believe our brewing process,Fermentus Interruptus, will allow us to keep our high quality product intactwhile reducing the production cost, thereby enhancing overall profitability.

 

*Labor*

 

Our labor costs expressed as a percentage of revenuesdecreased 0.2% during the third quarter of 2004 compared to the third quarterof 2003.  These costs decreased 1.0% as apercentage of revenues in the first three quarters of 2004 compared to thefirst three quarters of 2003.  Althoughwe have experienced increases in employee benefit costs such as health andworkers compensation insurance, our increased revenue base in the first threequarters of 2004, due primarily to the honeymoon effect, enabled us to obtainan overall decrease in labor as a percentage of revenue.

 

We expect that labor costs will vary as we add newlocations.  Minimum wage laws, locallabor laws and practices, as well as unemployment rates vary from state tostate and will affect our labor costs, as will hiring and training expense atour new locations.  Our managementbelieves that retaining good employees and more experienced staff ensures highquality guest service and reduces hiring and training costs.

 

*Direct and Occupancy*

 

Our direct and occupancy expenses decreased 2.9% as apercentage of revenues during the thirteen and thirty-nine weeks endedSeptember 26, 2004 compared to the thirteen and thirty-nine weeks endedSeptember 28, 2003, respectively.  Operatingsupplies, rent and occupancy costs, repairs and maintenance and advertisingexpense represent the majority of our direct and occupancy expenses, asubstantial portion of which is fixed or indirectly variable.  Decreases in direct and operating expenseswere primarily in the areas of employee meal costs and advertising.  Although we experienced increases in creditcard discounts, hiring and training expenses, various supplies and fixed rent,our higher unit volumes reduced the fixed and indirectly variable costs as apercentage of revenues.

 

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**Pre-Opening Costs**

 

We experienced pre-openingcosts during the first half of 2004 related to our Davenport, Lincoln andMinneapolis restaurants.  During thattime, we incurred pre-opening costs of $197,769 in Davenport, $312,976 inLincoln and $237,578 in Minneapolis.  TheLincoln pre-opening expenses were unusually high due to the distance betweenLincoln and the restaurants at which the new managers trained, causing us toincur significantly more travel, lodging and meal expenses.  Additionally, we encountered some unexpectedpersonnel turnover and related costs during the training process there.  Based upon general increases in the costs oflabor, travel and lodging as well as our plan to train managers for anadditional week prior to each opening, we expect future pre-opening expenses toaverage between $275,000 and $300,000 per unit. Such costs are primarily incurred in the month of, and two months priorto, the restaurant opening.

 

**General and Administrative**

 

General and administrative expenses include salaries and benefitsassociated with our corporate staff that is responsible for overall restaurantquality, future expansion into new locations and financial controls andreporting.  Other general andadministrative expenses include corporate governance costs, professional fees,office administration, centralized accounting system costs, and travel by ourcorporate management to the restaurant locations.  General and administrative expenses increased$170,055 during the third quarter of 2004 compared to the third quarter of 2003.  Such expenses increased $657,694 during thefirst three quarters of 2004 compared to the first three quarters of 2003.  These expenses decreased 5.2% and 4.0% as apercent of revenue, during the third quarter and first three quarters of 2004,respectively, compared to the same periods in 2003, indicating that revenuesgenerated from our new locations more than offset the related increase ingeneral and administrative expenses.  Inorder to retain and recruit core management and further build ourinfrastructure to facilitate growth, we incurred increased expenses related topayroll and benefits as well as additional rent and office upkeep expenses inthe first three quarters of 2004 compared to that of 2003.  During the first quarter of 2003, ourpresident and chief executive officer did not receive any monetary compensationfrom our company as we believe the options issued to him represented reasonablecompensation for his service through March 30, 2003.  Additionally, our travel related expenseshave increased with the opening of new restaurants and the development of newsites for expansion and our advertising costs increased with a billboardcampaign in the first two months of 2004.

 

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

 

**Depreciation and Amortization**

 

Depreciation and amortization expense increased$256,987 during the third quarter of 2004 and $581,802 during the first threequarters of 2004 compared to the same periods in 2003 due principally to theadditional depreciation related to the newly opened restaurants.  As a percentage of revenues, during the firstthree quarters of 2004, depreciation expense decreased by 1.0% compared to thefirst three quarters of 2003, due to the higher unit volumes.

 

**Other Income and Expense**

 

Interest expense net of interest income increased$206,902 during the third quarter of 2004 compared to the third quarter of2003.  Interest expense net of interestincome increased $515,715 during the first three quarters of 2004 compared tothe first three quarters of 2003.  Theincreases were due to the increase of debt and capital leases and the reductionof invested cash as we opened new units. Management expects interest expense will increase with futureexpansion.  Other income and expense forthe first three quarters of 2004 included a $23,520 loss on assets which hadnot been fully depreciated.

 

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**Liquidity and Capital Resources**

 

We have funded our capital requirements sinceinception through sales of securities, building and equipment leases, debtfinancing and cash flow from operations. To obtain working capital to fund additional expansion, we entered into asecurities purchase agreement with accredited investors for the sale ofapproximately $8.5 million of common stock and warrants to purchase common stock on September17, 2004.  The agreement provided forsecurities to be sold at an offering price of $3.25 per share of common stock,with one warrant for every 2.5 shares of common stock sold.  The warrants have a term of five years andare exercisable at $5.00 per share, subject to certain anti-dilutionadjustments.  We completed the initial closing of thisprivate placement, generating gross proceeds of $1,925,157 with the sale of592,356 shares of common stock and issuance of warrants to purchase 236,944shares of common stock.  In connectionwith the initial closing, we issued our agent a warrant to purchase 29,618shares of common stock at an exercise price of $5.00 per share, paid our agentcash commission of $96,258 and paid expenses related to the transaction of$125,341.  Completion of the sale of theremaining shares and warrants is subject to approval by our shareholders incompliance with Nasdaq Marketplace Rules.

 

During the thirty-nine weeks ended September 26, 2004,operating activities provided us $804,554 of net cash, the sale of common stockdescribed above provided us $1,774,785 of net cash, issuance of common stockpursuant to the exercise of options and warrants provided us $91,214 in netcash, and proceeds from long-term debt and our line of credit provided us$949,102 of net cash.  We used $2,307,910of cash to purchase equipment and other assets primarily for our Davenport,Lincoln and Minneapolis locations, made payments on our debt and capital leaseobligations aggregating $498,584, and paid cash dividends aggregating $108,783to holders of our convertible preferred stock.

 

During thethirty-nine weeks ended September 28, 2003, the issuance of securities providedus $1,381,989 of net cash and proceeds from long-term debt provided us $428,572of net cash.  We used $317,108 of suchcash in operating activities, $1,989,493 to purchase equipment, primarily forour West Des Moines and Cedar Rapids locations, paid cash dividends of $168,384to holders of our preferred stock, and made payments on our debt and capitalleases aggregating $231,859.

 

In January 2004,we opened our restaurant in Davenport.  We are leasing this property from our developer under a 20-year leaseagreement.   Our annual lease paymentsare $341,250 with $194,250 classified as a capital lease and the remaining$147,000 classified as an operating lease. This lease may be extended at ouroption for up to five additional five-year periods.

 

In January 2004, we entered into a $750,000 loan agreement with anindependent financial institution.  Theproceeds of this loan financed the purchase of equipment for the Davenportlocation.  The loan is secured by substantially all ofthe personal property of our company and is guaranteed by one of ourdirectors.  The interest rate on the loanis 6.125% per annum and the loan matures in January 2011.

 

InApril 2004, we entered into a revolving line of credit agreement with maximumavailability of $750,000 with an independent financial institution.  We paid annual interest at a rate of 6.75% onamounts we borrowed, which interest payments aggregated approximately$5,307.  This line of credit expiredSeptember 1, 2004, at which time we renewed the line at an annual interest rateof 7.00%.  This line of credit is securedby substantially all our personal property, is guaranteed by one of ourdirectors and expires September 15, 2005. As of September 26, 2004, we had $199,102 outstanding on this line.

 

In May 2004, weopened our restaurant in Lincoln.   Weare leasing this property from our developer under a 20-year lease agreementfor the building and a 15-year lease agreement for the land.   Our annual capital lease payments on thebuilding lease are $168,000 and our annual operating lease payments for theland average $151,165 per year over the initial term of the lease. These leasesmay be extended at our option for up to five additional five-year periods.

 

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In June 2004, weopened our restaurant in Minneapolis.  Weare leasing this property from an independent third party under a 20-year leaseagreement.  Our annual lease payments are$367,500 with $235,200 classified as a capital lease and the remaining $132,300classified as an operating lease. This lease may be extended at our option for upto five additional five-year periods.

 

With cashgenerated from operations and proceeds from our private placement, managementbelieves that we will have sufficient funds to pursue our business strategyover the next three years.  We continueto explore new restaurant sites and we expect to continue our strategy ofobtaining equipment financing as needed for additional units. Our expansionplans are dependent upon shareholder approval of the sale of the remainingshares and warrants offered as part of our September 17, 2004 securitiespurchase agreement with accredited investors. If we do not receive such approval, we will need to seek variousalternatives to obtain capital to fund additional expansion, including debt andequity financing, partnerships with investors or combinations thereof.  The amount of financing required for newrestaurants depends upon the definitive locations, leasehold improvement costsand construction costs.  We cannot assureyou the financing needed to pursue our expansion strategy will be available onterms acceptable or favorable to us, or at all.

 

**Commitmentsand Contingent Liabilities**

 

*Operatingand Capital Leases:*

 

As of September26, 2004, we had seven land and building lease agreements.  One of these leases expires in 2019, one in2020, two in 2023, and the remaining three expire in 2024, all with renewableoptions for additional periods.  Thebuilding portions of these leases are classified as capital leases becausetheir present value was greater than 90% of the estimated fair value at thebeginning of the lease.  The landportions of these leases are classified as operating leases because the fairvalue of the land was more than 25% of the leased property at the inception ofeach lease.  Under three of the leases,we are required to pay additional percentage rent based upon restaurantsales.  As of September 26, 2004, futureobligations relating to the land portion of these seven leases aggregated$15,616,046 plus percentage rent.  Thescheduled rent increases for the land during the life of each lease arerecognized on a straight-line basis. Future obligations relating to the building portion of these sevenleases aggregated $23,737,608 at September 26, 2004.

 

In 2001, weentered into a 20-year operating lease for land upon which we built our Fargorestaurant.  As of September 26, 2004,future obligations under the terms of this lease aggregated $1,233,800 pluspercentage rent.

 

As of September26, 2004, we have additional capital lease obligations outstanding of $770,683 forequipment leases expiring in 2008, and operating lease obligations outstandingaggregating $49,250 for leases expiring in 2005 for office space and variousequipment items.

 

*PersonalGuaranties:*

 

Certain of ourdirectors have personally guaranteed certain of our leases and loanagreements.  In connection with the $1.5million loan we obtained in July 2001 to finance our Fargo restaurant, weentered into an agreement concerning guaranty which provides, among other things,that such guarantors will be indemnified from any liabilities they may incur byreason of their guaranties of our indebtedness. The agreement contains variouscovenants, one of which requires us to use our best efforts to obtain a releaseof one individual’s guarantee obligation by January 1, 2006.  If we have not accomplished this, we areobligated to pay him a monthly guarantee fee in the amount of $1,000 until suchrelease is obtained.  Additionally, at ameeting held in March 2004, our board of directors agreed to compensate ourPresident and Chief Executive Officer for his personal guaranties of equipmentloans entered into in August 2003 and January 2004.  The amount of such compensation is calculatedbased on 3% of the weighted average daily balances of such loans at the end ofeach monthly accounting period.  As ofSeptember 26, 2004, we had accrued $26,513 of such fees.

 

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*EmploymentAgreement:*

 

We have enteredinto an employment agreement with our President and Chief Executive Officer.  In lieu of a salary, we issued stock optionsto him in 1999, 2001 and 2003 as compensation for his services through March30, 2003.  Effective April 1, 2003, webegan paying an annual salary to such officer. At a meeting held in March 2004, our board of directors approved anincrease in his annual salary to $175,000 effective July 1, 2004.  Among other provisions, the employmentagreement includes change in control provisions that would entitle him toreceive severance pay equal to 18 months of salary if there is a change incontrol of our company and his employment terminates.  Based on his current salary, the maximumcontingent liability for such severance pay would be $262,500.

 

*DevelopmentAgreement:*

 

We have enteredinto a development agreement with Dunham Capital Management L.L.C. (“Dunham”)for the development of our restaurants. Dunham is controlled by Donald A. Dunham, Jr., who is an affiliate ofBrew Buddies, L.L.C., a significant beneficial owner of our securities.  The agreement gives Dunham the right todevelop, construct and lease up to 22 restaurants for us prior to December 31,2012.  We are not bound to authorize theconstruction of restaurants during that time period, but generally cannot useanother developer to develop or own a restaurant as long as the developmentagreement is in effect.  We can useanother developer if Dunham declines to build a particular restaurant, if theagreement is terminated because of a default by Dunham, or if our company issold or merged into another company.  Inthe case of a merger or sale of our company, the development agreement may beterminated at such time as Dunham has completed seven restaurants under theagreement.  The development agreementprovides for a cooperative process between Dunham and our company for theselection of restaurant sites and the development of restaurants on thosesites, scheduling for the development and construction of each restaurant oncea location is approved, and controls on the costs of development andconstruction using bidding and guaranteed maximum cost concepts.  The development agreement provides thatrestaurants will be leased to us on the basis of a triple net lease.  The rental rate of each lease will becalculated using a variable formula which is based on approved and specifiedcosts of development and construction and an indexed interest rate.  The term of each lease is 20 years with fivefive-year options to renew.  As ofSeptember 26, 2004, five restaurants have been constructed for us under thisdevelopment agreement.

 

*Summaryof Contractual Obligations:*

 

The followingtable summarizes our obligations under contractual agreements as of September26, 2004 and the time frame within which payments on such obligations aredue.  This table does not include amountsrelated to percentage rent as such amounts have not yet been determined.  In addition, whether or not we would incurany additional expense on our employment agreement with Mr. Wagenheim dependsupon the existence of a change in control of the company.  Therefore, no percentage rent or employmentagreement expense have been included in the following table.

 
| ** **                  | ** ** | **Payments due by period** | ** ** |
|-----------------------------|------------|----------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                  | ** ** | **Less than   1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5   years** | ** ** |
| Line of credit              |       | $                          | 199,102    |   | $ | 199,102 |   | $ | — |   | $ | — |   | $ | — |   |
| Long-term debt              |       | 2,785,009                  |       | 54,417 |   | 468,026 |   | 1,773,978 |   | 488,588 |   |
| Capital lease obligations   |       | 24,508,291                 |       | 402,229 |   | 3,033,063 |   | 2,740,500 |   | 18,332,499 |   |
| Operating lease obligations |       | 16,899,096                 |       | 253,310 |   | 1,908,600 |   | 1,881,696 |   | 12,855,490 |   |
| Personal guarantees         |       | 133,704                    |       | 10,042 |   | 67,289 |   | 42,284 |   | 14,089 |   |
| Total obligations           |       | $                          | 44,525,202 |   | $ | 919,100 |   | $ | 5,476,978 |   | $ | 6,438,458 |   | $ | 31,690,666 |   |

 

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**Qualitativeand Quantitative Disclosures about Market Risk**

 

Our company isexposed to market risk from changes in interest rates on debt and changes incommodity prices.

 

*Changesin Interest Rate:*

 

We are exposedto market risk from changes in interest rates relating to a lease for equipmentunder an agreement expiring in 2008.  OnNovember 20, 2004, we will be required to amortize approximately $416,600 ofthe then remaining balance at an interest rate of prime plus 2% for 42additional months.  At such time, ourpayments will increase only if the prime rate is more than 10.3%.

 

In February2007, we will have a balloon payment due of approximately $1,325,000 on theloan we obtained from an independent financial institution in July 2001.  Currently, this loan bears a fixed interestrate of 8.75%. If it becomes necessary to refinance such balloon balance, wemay not be able to secure financing at the same interest rate.  The effect of a higher interest rate woulddepend upon the negotiated financing terms.

 

*Changesin Commodity Prices:*

 

 Many of the food products we purchase areaffected by commodity pricing and are, therefore, subject to unpredictableprice volatility.   These commodities aregenerally purchased based upon market prices established with vendors.  Extreme fluctuations in commodity pricesand/or long-term changes could have an adverse affect on us.  Although SYSCO Corporation is our primarysupplier of food, substantially all of the food and supplies we purchase areavailable from several sources, which helps to control commodity pricerisks.  Additionally, we have the abilityto increase menu prices, or vary the menu items offered, in response to a foodproduct price increases.  If, however,competitive circumstances limit our menu price flexibility, margins could benegatively impacted.

 

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

 

**Seasonality**

 

We expect that our sales and earnings will fluctuatebased 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**

 

The primaryinflationary factors affecting our operations are food, supplies and laborcosts.  A large number of our restaurantpersonnel are paid at rates based on the applicable minimum wage, and increasesin the minimum wage directly affect our labor costs.  In the past, we have been able to minimize theeffect of these increases through menu price increases and otherstrategies.  To date, inflation has nothad a material impact on our operating results.

 

**ITEM 3********    ****Controls and Procedures**

 

We maintain a system of disclosure controls andprocedures that is designed to provide reasonable assurance that information,which is required to be disclosed, is accumulated and communicated tomanagement timely.  At the end of theperiod covered by this report, we carried out an evaluation under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Interim Chief Financial Officer, of the effectiveness ofthe design and operation of our disclosure controls and procedures pursuant toExchange Act Rule 13a-15.  Based upon thatevaluation, our Chief Executive Officer

 

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and Interim Chief FinancialOfficer concluded that our disclosure controls and procedures are effective intimely alerting them to material information relating to our company requiredto be disclosed in our periodic filings with the SEC.

 

Duringour most recent fiscal quarter, there has been no change in our internalcontrol over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f)under the Exchange Act) that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

**PARTII**                                         OTHER INFORMATION

 
| ITEM 1 |   | Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | Not applicable.                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| ITEM 2 |   | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | (a)                                  A description of unregistered sales of  equity securities during the third quarter of 2004 was previously included in  our Current Report on Form 8-K, dated September 17, 2004. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | (b)                                 Not applicable.                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | (c)                                  Not applicable.                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| ITEM 3 |   | Defaults upon Senior  Securities                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | Not applicable.                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| ITEM 4 |   | Submission of Matters to a Vote of Security Holders                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | Not applicable.                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| ITEM 5 |   | Other Information                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | Not Applicable.                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| ITEM 6 |   | Exhibits and Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | (a)                                  Exhibits                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | See “Index to Exhibits.”                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | (b)                                 Reports on Form 8-K                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | On September 17, 2004, we filed a Current Report on  Form 8-K reporting that we entered into a Securities Purchase Agreement with  accredited investors for the sale of approximately $8.5 million of common  stock and warrants to purchase common stock, and completed the initial  closing thereunder.                                                                                  |

 

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**SIGNATURES**

 

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

 
|                   |   | GRANITE CITY FOOD &  BREWERY LTD. |
|------------------------|--------|---------------------------------------|
|                   |   |                                  |
| Date: November 1, 2004 | By:    | /s/ Monica A. Underwood               |   |
|                   |   | Monica A. Underwood                   |
|                   |   | Interim Chief Financial  Officer and  |
|                   |   | Corporate Controller                  |

 

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**INDEX TO EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                        |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                   |
| 10                  |       | Securities  Purchase Agreement between the Company and the Investors named as signatories  thereto, dated September 17, 2004 (incorporated by reference to our  Registration Statement on Form S-3, filed on October 15, 2004 (File No.  333-119768)). |
|                |       |                                                                                                                                                                                                                                                   |
| 31.1                |       | Certification by  Steven J. Wagenheim, President and Chief Executive Officer of the Company,  pursuant to Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.                                             |
|                |       |                                                                                                                                                                                                                                                   |
| 31.2                |       | Certification by  Monica A. Underwood, Interim Chief Financial Officer and Corporate Controller  of the Company, pursuant to Exchange Act Rule 13a-14, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                          |
|                |       |                                                                                                                                                                                                                                                   |
| 32.1                |       | Certification by  Steven J. Wagenheim, President and Chief Executive Officer of the Company,  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                               |
|                |       |                                                                                                                                                                                                                                                   |
| 32.2                |       | Certification  by Monica A. Underwood, Interim Chief Financial Officer and Corporate  Controller 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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